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Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.

June 13, 2002

"Debt Settlement Companies"

Host: Got debt? Sure, pretty much everyone does. There are plenty of good ways to get out from under it, but on this week's edition of "The Road To Riches," personal finance expert Jordan Goodman says there are some not-so-good ways as well.

As Americans stagger under the weight of $1.8 trillion in consumer debt -- over $700 billion of it in credit card debt alone -- many companies are coming out of the woodwork to try to take advantage of the situation and offer debtors an "easy way out."

By far, the biggest and newest group of companies provide what are called "debt settlement" services. Featured prominently in their ads, and on their Web sites, are phrases like: "Avoid filing bankruptcy"; "Stop harassing phone calls"; and "20-30 minutes to free yourself of debt."

What they claim to do is negotiate with your creditors so that you pay only 25 to 50 cents on the dollar of what you owe. This will pay off your outstanding balance without your having to file for bankruptcy.

These companies have names that may sound legitimate and consumer-friendly.
    What’s wrong with using a debt settlement company?
  1. They will absolutely ruin your credit rating, going forward. Because you have not paid the principal back in full to the creditor, as you do with a credit counseling service, you will have an enormous CHARGE-OFF posted right at the top of your credit report, which will make getting future loans nearly impossible for at least 7 years.
  2. They charge huge, hidden fees. If they get you a deal for 50 cents on the dollar, they may actually be getting a deal for 40 cents on the dollar from the creditor, and they pocket the 10 cents a dollar difference.
  3. They operate illegally and often have criminal connections. The state of California, technically, does not allow debt settlement to take place, yet many of these companies are based there and solicit California customers. The Law Centers for Consumer Protection are run by Andrew Capoccia, who was disbarred from the state of New York after many cases of abusing clients going through bankruptcy proceedings. So, he went across the river to Vermont to set up the Law Centers.

If you have a lot of debt, "settling" it will not make your life easier, but only more difficult. A better way to get out of debt is to use a reputable consumer credit counseling agency, like the Debt Relief Clearinghouse at 800-779-4499, where you will pay your debt off at much lower interest rates -- and still keep your credit record intact.

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