Debt Settlement Can Lead to Higher Debt Levels

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A recent Wall Street Journal Online article tells the story of a part-time security guard in Ohio who watched his debt swell from $15,000 to $20,000 during the time he was working with a debt settlement firm. The company he was working with failed to settle any of his debts and he wound up filing for bankruptcy.

On Monday, a Florida judge entered an order to wind the debt settlement firm he was working with down and set up a procedure for consumers to request refunds of the fees they had paid.

Like many consumers, he was most likely drawn towards debt settlement as a way to eliminate his consumer debt within a reasonable period of time and get a fresh start. Debt settlement can be an effective alternative to bankruptcy.

What most people neglect to consider is what happens to your debt while going through debt settlement.

In most cases, when attempting debt settlement, you will no longer be paying your creditors. Instead, you will be funneling those payments into a side account you’ve established. The goal is to save roughly 50% of what you owe in that account to give you leverage with your creditors.

Depending on how much you can afford to save every month, it may take you anywhere from 12 - 36 months to save enough money to be in a position to settle. During that time, your creditors are not receiving any payments. The lack of payments would result in them tacking on penalties, late fees, and accrued interest to your balance.

As you continue to save money into your settlement account, your outstanding balance will continue to grow. The longer it takes you to save, the higher you will watch your balances climb.

This must be taken into account if you are evaluating debt settlement as an alternative to Chapter 13 Bankruptcy (debt consolidation). If you go through the debt settlement process only to drop out before settling any of your debts, you may wind up paying more in bankruptcy than if you had gone that route in the first place.

Other risks associated with not paying your creditors throughout the debt settlement process include an increase in the collection efforts of your creditors and the likelihood of lawsuits, judgments, and wage garnishments. All of these risks can be minimized by setting up a debt settlement program so that you are able to settle most of your debt within 18-months.

Sources:
Wall Street Journal

About the Author:
Chris Rocks is the Founder and Executive Director of the Credit Advisory Alliance (CAA), a membership based organization helping those who have suffered a financial crisis restore their credit and reinsert themselves back into the credit-driven economy. Prior to founding CAA, Chris had successfully helped consumers achieve their financial goals as both a Financial Advisor and the Vice President of a Mortgage Origination Firm.

Post written by Chris Rocks

2 Responses to “Debt Settlement Can Lead to Higher Debt Levels”

1. Dan Says:
   October 29th, 2008 at 1:55 pm

   Good information. Also lets let consumers know most debt management companies have no real lawyers retained or in house. Consumers should check up on companies by contacting their state attorney general’s office to make sure the claims that the debt management companies make are actually true.

   Consumers, also check with your state banking division to make sure the company you choose to settle your debt with is legally registered in your state. Check and see if your state is a non profit state which simply means you can obtain the services of a registered company in your state for your donations.

   Last and less important is BBB rating. why do I say this, because complaints with the BBB are easy to wipe out and most consumers do not even take it upon themselves to report bad business practices by debt management or settlement companies.

2. Chuckles Says:
   April 14th, 2011 at 1:01 pm

   3M3YXn Good point. I hadn’t tohguht about it quite that way. :)

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