Debt settlement company traps

Here’s what debt settlement agencies won’t tell you.



Online only.


It’s no secret that I am not a fan of debt-settlement companies. When I revised Debt-Free Forever last year, I put in a section on how to manage your own debt-settlement and why using a company to do it for you may not be to your advantage. And yet debt settlement continues to be one of the things people ask about most often.

Now Ontario is planning to bring in legislation banning up-front fees, capping those fees, mandating that contracts be “transparent” and establishing a 10-day cooling off period. I joined Minister Tracy MacCharles to make the announcement, which wasn’t received with many oohs and ahhs. Maybe it’s because Alberta, Manitoba and Nova Scotia have already created debt-settlement rules and it’s about time Ontario got in on the act. Hey, better late than never!

The lure of debt-settlement is significant: pay less to settle your debts; manage one account instead of several; avoid bankruptcy. Problem is what they don’t tell you. Here are the drawbacks so you can be an informed consumer if you’re considering the debt-settlement path.

A debt settlement company will likely ask you to stop making all payments while they negotiate with your lenders. They’ll tell you that will put them in a better position to negotiate and it’ll let you save the money you need for the debt settlement. What they likely won’t say is that while your lenders go unpaid, your credit history goes straight into the dumper! And when the debt is finally settled, there will be a note on your credit history that says you settled for a lesser amount, further marring your credit for years to come.

It ain’t cheap either! Over the process, debt settlement companies charge thousands of dollars to save you all that money they’ve promised. Some charge up-front fees. Some charge a percentage of each payment you send it to satisfy the settlement. Either way, it’ll cost. Of course, those fees mean you’ll be out of the woods, so it’ll be well worth it, right? Maybe not.

Debt settlement companies don’t have the right to negotiate with your creditors unless you give them your power of attorney, which you should never do.

Also, the agreement the debt-settlement company makes is not binding. Nor can they guarantee that they’ll deliver the goods. That’s a pretty significant downside. They often offset that particular drawback by saying if they can’t do the job they won’t charge you. But that may take weeks or months to figure out as they collect fees and negotiate on your behalf. Sure, they may refund all or part of the fees they’ve collected, but in the meantime your credit history will have been besmirched and you won’t stand a chance of a successful negotiation. It’ll be off to the bankruptcy trustee for you next.

7 comments on “Debt settlement company traps

  1. Thanks for posting this. It's the first negative commentary I've seen on debt settlement – probably because my Google-fu could use some work. Does the same hold true for trustees, or are they different? I've been told by a trustee that a consumer proposal submitted through a trustee is legally binding.


    • A consumer proposal administered by a trustee is very different from the debt settlement companies described above: fees are set by the government, and are entirely transparent. The proposal is sent to the creditors within days of signing. Creditors are given the opportunity to vote on your offer, and if it is accepted, all of the unsecured creditors are included (and barred from continuing collection). If it is not accepted, the trustee will work with you to try to sweeten the deal and get the proposal accepted.

      Most trustees offer a free consultation. Information is power; if you have questions about your debt, give one a call.


  2. PART 1

    One should note that a debt settlement proposal can be either formal or informal.
    Formal proposals to creditors are done via insolvency applications through an accredited consumer proposal agency, usually consented to by most or all the creditors.
    Your total debt is clumped together, and depending on you wages, it may be discounted sometimes to up to 25 percent.
    A similar procedure applies to the so-called debt consolidation loan.
    The accepted proposal to creditors contains the agency's fees which many people overlook, and consolidation loan comes with an exorbitant interest rate, so by the time you end up paying it off (usually 5 years), you pretty well make up for all the discounts initially granted.
    The added problem is that the (derogatory) credit record shows the settlement processs throughout its pay-down period (usually 5 years). To make matters worse, even after it’s paid, it continues to show for additional three years, rendering you practicably incapable of reintegrating into financial society until the very end of such a long time.


  3. Part 3
    It may take time, sometimes 2-3 years, but sooner or later, realizing that there is little or nothing the creditors can do to recover their debts, they eventually go for it, especially before the credit retention kicks in (6 years from the last payment), and erases any record of debt on the bureaus record.
    Notwithstanding the retention of credit data, the debt remains forever. However, you may be at that time in an excellent position to settle for pennies on the dollar and redeem yourself, both legally and morally, without suffering the consequences of the long derogatory reporting, as is the case with creditor’s proposals.
    Finally, for the sake of clarity, the record of settlements does not appear on credit bureau records as partially settled, but simply ‘settled’, regardless of whether the debt was settled for 10 cents or 100 cents on the dollar.


  4. Part 2
    For people that fell down hard on their luck, I always suggest an easier and less painful way to settle; by way of informal settlement offers.
    The best time to do that is after 2 years has passed from making your last payment on the loan or charge card, as the Statute of Limitations then usually kicks in, leaving the creditors unable to sue.
    The idea is then to make a much smaller settlement offer, depending on your income and assets, sometimes as low as 10 cents on a dollar.


  5. It is a shame so many people are mislead with information from all sides. The statute of limitation is 2 years in Ontario, each province has its own specific statue of limitations. They have been working to come to a common ground on them just as the provinces are slowly moving to have mirroring regulations for debt settlement companies.
    Remember that statute of limitations is often based on the last paid date of your account. If you wait 2 years(leaving you 4 years before the account falls off your bureau) then if you make a settlement offer at 2 years, you are now making a payment on that account and the clock starts all over again.
    It is often necessary to resolve all of your debts in full when purchasing a home, even if a year ago you settled an account and saved $50, it is well worth it to you to call that company back and pay off the remainder.
    There are a lot of debt settlement companies that are taking advantage of consumers who have often been abused by the creditors and the credit system already. However not all are the same.


  6. Company insurance is a better way to save your company from many problems.
    Company scam is very common in pallet business. It shows he has knowledge about pallet, make me feel it was a real business. He left a phone number, and I search it online, and now I got it is a scam. Thanks for your blog.


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