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How debt settlement companies operate

Becoming overwhelmed by credit card debt can easily occur for anyone, especially if someone loses one's job, becomes ill, or is confronted by an unplanned financial crisis. While many debt settlement companies claim to be able to negotiate a settlement with a consumer's credit card company at a reduced rate, it's important to note that the process is not as easy as they may make it seem, but instead comes with many strings attached.

Often debt settlement programs require those in debt to set aside a certain amount of money each month for up to 36 months in order to settle their debts. It's this fact that ultimately leads many people to drop out of these programs before having all of their debts resolved.

Also, because a consumer's creditors are not obligated to agree to a negotiated settlement, it is common that consumers end up setting the funds aside only to find out that their debts are still outstanding. With that in mind, debt settlement companies typically target smaller debts first to negotiate, while those with larger debts continue to mount due to compound interest and fees.

Because it's common for debt settlement companies to recommend that consumers stop paying on their debts, their credit scores quickly decline as fees and interest accumulate. As a result, collection calls from creditors begin which, in turn, gives way to a stronger potential for the consumer to get sued, have wages garnished, or a lien placed on one's home.

The Federal Trade Commission's Telemarketing Sales Rule prohibits companies from engaging in telemarketing services that charge fees. Despite this, debt settlement companies do so and long before any of the consumer's debts are ever settled. Others guarantee the elimination of a consumer's unsecured debts or claim that they will help them take advantage government bail out programs for consumers and don't.

Then there are those settlement companies that instruct their customers to stop communicating with their creditors without explaining the downside of doing so. Other companies also may make false promises to help consumers settle their debts for pennies on the dollar with promises to end the collection calls as well.

If you or someone you know is drowning in credit card debt and contemplating using a debt settlement company, a Knoxville, Tennessee, bankruptcy attorney may be a positive ally.

Source: Federal Trade Commission, "Settling credit card debt," accessed March 07, 2017

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William E. Maddox Jr., L.L.C.
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