5 Red Flags You Should Look Out For With Debt Settlement Companies

If you’ve taken the initiative on getting free and clear of that ugly debt that’s been hanging over your head you are not alone. There are many people, especially in this economy, that under the extreme burden of debt and are looking at ways to get rid of it. There’s a ton of information on the web, and if you’ve been doing any research you will see a plethora of debt settlement companies on the internet. If you dig a little deeper you will find out there are some fees associated with debt settlement but maybe you’re thinking, “Hey, it’s better than filing for bankruptcy!”. Think twice and read this article to find out what debt settlement is really all about because a lot of offending companies will take your money and never lift a finger to do anything about your debt and possibly make your financial situation worse.

Red Flags

Most of the time these scam organizations will advertise that they will decrease your debt significantly in a short amount of time, in their advertising they claim that they will play “hard ball” and negotiate with your creditors. They promise that you will only have to pay a fraction of what is owed, but as the saying goes, if it’s too good to be true, it usually is. Most Debt settlement scams ask for an enormous set-up fee as well as hundreds of dollars in monthly service charges, which in turn will increase your debt and could possibly ruin your credit rating.

Other debt settlement organizations will promise to contact all the creditors on your credit report to negotiate better terms, but in fact they will never speak with a single creditor. Just do a quick Google search of all the complaints on RipOffReport.com against debt settlement companies and it becomes very evident that there are a lot of bad apples in this industry. There are thousands of complaints reported according to the FTC (Federal Trade Commission) so it’s in your best interest to do your due diligence and research the debt settlement companies (or avoid them altogether, because there are other alternatives to debt settlement that we will talk about later) before you do anything.

In some of the worst cases, even when a consumer has the funds to pay off a settlement, the debt settlement company will fail to work on their behalf to even attempt to help the consumer. Even with all the horror stories out there on the web, people are desperate to avoid filing bankruptcy so they will agree to enter a debt settlement program regardless of the risks involved because worst case scenario-if it doesn’t work out with the company-they’re going to file bankruptcy anyways.

Here are five red flags you should look out for before you enter debt settlement:

If they fail to give sufficient references.
If you have a bad feeling about the terms of the contract that should be a red flag. The terms should be clear and concise; not filled with a lot of weird legal mumbo jumbo.
If they have a poor credit rating with the BBB (Better Business Bureau).
If they have a lot of complaints on the internet; or sub-par reviews on the web
If they promise you the moon, that should be a definite red flag. Most legitimate debt settlement companies-if they are really good-will cut your debt by half in a reasonable amount of time, but if you speak with an organization that claims to get rid of $20k in credit card debt in two weeks than that should be a definite red flag.
Some companies have been accused of failing to contact creditors and debt collectors as promised. Complaints have been reported, according to the Federal Trade Commission, that even after consumers inform the organization they have sufficient funds to pay a settlement, they still fail to work on their behalf. Unfortunately, in an attempt to avoid bankruptcy, many consumers who have taken the settlement route end up in a worse position than when they started.

Is there a better alternative?

Debt settlement is not the best solution for most people, even if you’re staring down the barrel of a bankruptcy most consumers should seek out credit counseling. Credit counseling is probably the best alternative to finding ways to getting out from under your debt because a lot of the times you can get out from under your debt without having to settle. Debt consolidation or settlement takes several years to go through, and depending on the size of your debt it may be in your best interest to pay your creditors directly than having you payment accumulate in hopes of a lump-sum payoff. The only way to truly get rid of debt is proficient counseling and a commitment to tackle the debt head on.

Most states require that consumers seek out credit counseling, at a minimum 180 days prior to filing for bankruptcy, and for good reason too. Credit counseling is necessary when your debt becomes too much to cope with, think about credit counseling when your debt becomes out of control, it may be the best first step toward financial freedom that you can make.