Debt Settlement Traps - CBS News 8 - San Diego, CA News Station - KFMB Channel 8

THURSDAY, February 19, 2009

Debt Settlement Traps

Posted: Updated:

Americans are buried under more than 900 billion dollars in Credit-card debt. No doubt you've seen debt-settlement companies advertise that they'll work with your creditors to reduce the money you owe. But Consumer Reports says watch out, because you could end up in even worse financial trouble.

Single mom Marissa Ruiz supports her kids on a social-worker's salary. When she found herself struggling with more than ten-thousand dollars worth of credit-card debt, she turned to a debt-settlement company for help."They gave examples where if you owed a certain amount of money, they could cut it basically in half," she says.

After five months, Marissa had handed over more than 600 dollars in fees, but her debt hadn't been reduced at all. "My creditors were getting more and more unhappy, harassing me more, threatening to garnish my check, and the whole process was getting worse instead of better."

Consumer Reports' Bob Tiernan says some debt-settlement companies promise to help, but can land people in even bigger trouble.  "A lot of the time, the company will tell you to stop paying your bills to build up some savings. But this makes your original debt grow as you miss payments and get hit with penalty fees and finance charges."

And that's not all. You'll also owe the company itself. "Typically, these debt-reduction companies charge 15 percent of your total debt as an up-front fee, plus 20 percent if they reach a settlement," says Tiernan.

Consumer Reports says a better option - contact your creditors directly. It's possible to negotiate down the debt that you owe to a fraction of what it was before. In fact, bank officials that we talked to said they don't give any better deals to the debt companies than they do to individuals that call them up personally.

Another option - go to debtadvice.org and look for a certified non-profit credit counselor through the National Foundation for Credit Counseling.  These counselors will help you either for free or for a set fee. Marissa ultimately did just this and in a year's time, managed to reduce her debt by nearly ten-thousand dollars.

Consumer Reports says that in this bad economy, it expects unscrupulous debt-settlement companies to flourish. A good rule of thumb, no matter what type of financial crisis you're dealing with - if the deal sounds too good to be true, it probably is.

Powered by Frankly
All content © Copyright 2000 - 2018 Midwest Television, Inc. All Rights Reserved.
For more information on this site, please read our Privacy Policy, and Terms of Service, and Ad Choices.