We have all heard the nauseating commercials: “If you owe $10,000 or more on credit cards, you may be eligible for a special
program that will allow you to settle your debt for a fraction of what you owe! For more information on settling your debt in a government bailout era,
What they don’t tell you is that they have an incredibly low success
rate or the reasons for their incredibly low success rate. Here are a few:
1. They take almost all of their (unconscionably large) fee upfront. Usually,
it works like this. They set you up on a payment plan paying say, $1,000
a month (which is usually about 4 times what you could afford). They take
the first 4-5 months as their initial fee. Then, they take a percentage
of what comes in after that to pay out to creditors.
2. They don’t do anything until you are at least 180 days past due.
At that point, creditors have either turned it over to the collection
wing, turned it over to the litigation wing, or sold the debt for pennies
on the dollar. Only in the latter case will a reasonable settlement be
reached and usually, some creditors do one thing and others do something
else. In almost every case, at least one creditor sues and tries to garnish
wages or a bank account. And, the calls that debtors receive are voluminous.
3. They don’t tell you that it is entirely voluntary on the part
of the creditor and if one creditor refuses to play ball, the whole thing
will go up in smoke because you will get your wages or bank account garnished
by that one creditor, which will make it impossible for you to make the
This is a really good article in the New York Times addressing a lot of
these debt negotiator problems. It is pretty clear that debt negotiators have a very low success rate:
In the case of two debt settlement companies sued last year by New York
State, the attorney general alleged that no more than 1 percent of
customers gained the services promised by marketers. A Colorado
investigation came to a similar conclusion.
The industry's own figures show that clients typically fail to secure
relief. In a survey of its members, the Association of Settlement
Companies found that three years after enrolling, only 34 percent of
customers had either completed programs or were still saving for
"The industry is designed almost as a
said Scott Johnson, chief executive of US Debt Resolve, a debt
settlement company based in Dallas, which he portrays as a rare island
of integrity in a sea of shady competitors. "Consumers come into these
programs and pay thousands of dollars and then nothing happens. What
they constantly have to have is more consumers coming into the program
to come up with the money for more marketing."
The following account is typical of what I see frequently with people who
go to a debt negotiator before coming to see me:
Ms. Robertson made nine payments, according to Financial Freedom. Late
last year, a sheriff's deputy arrived at her door with court papers:
One of her creditors,
Capital One, had filed suit to collect roughly $5,000.
Panicked, she called Financial Freedom to seek guidance. "They said,
'Oh, we don't have any control over that, and you don't have enough
money in your account for us to settle with them,' " she recalled.
Her account held only $1,470, the representative explained, though she
had by then deposited more than $3,700. Financial Freedom had taken the
rest for its administrative fees, the company confirmed.
Bankruptcy may not be right for everyone, but debt negotiation (at least
through most of the firms out there) is rarely right for anyone.