Debt settlement companies could be a good thing if almost all of them were not crooked. Before most debt settlement companies begin, they break the laws of the State of South Carolina. Under South Carolina Law, a debt settlement company may not charge a fee at the beginning of the work that the debt settlement will be doing. If you find one that does not charge up front, they are probably legitimate. The company is also probably a non-profit supported by charitable gifts.
How does the scam work? The debtor is told to stop paying their creditors. Supposedly, the money that is being paid to the debt settlement company is being held so that a settlement offer can be made. If you dangle a lump of money, a creditor is more likely to settle. The creditor accepts the offer and the debt is paid off for the pennies on the dollar promised. These debt settlement companies are not being required to keep your money in a separate trust accounts. Even when the money is supposed to be in a separate account, it seldom actually is safe.
The advice that these companies are giving is similar to what I would give you. Why pay the creditor a little money if you cannot pay them what you are supposed to pay the creditor as agreed. As long as a creditor is able to drag a little money out of you, it is not motivated to take a lump sum. The difference is that honest companies will not have you pay them money up front. It is against the law for a company to be paid before the work is done. Attorneys may charge up front, but, why would they agree to a flat fee. When you are trying to work out settlements, it is very hard to know how much or how long you will have to deal with the creditors. For this reason, it is seldom financially prudent to hire an attorney to try and negotiate a settlement unless the sums are large.
These debt settlement companies will take your money for their fees first. Many times the debt settlement company will charge its fees and then simply go out of business without ever settling any debts. It costs a lot of money to run a massive advertising campaign and to keep the company owners living in the style that they believe that they are entitled to live. Very often, the money is gone and there is nothing to pay to the creditors.
This setup is nothing but a scheme where the money being paid today by you pays for some settlements on older accounts. Will the money that you pay be there to settle you debts. Oftentimes, the money being paid is not enough to keep paying the older claims, the advertising costs and the operating costs and living expenses of the founders. The complaints begin to be made and the business shuts down or is shut down.
Go to the Federal Trade Commission website and you will see a long list of debt settlement companies that have been put out of business because what was promised was never done. It is very common to see the same individuals being ordered to stop more than one time.
Debt settlement companies are bad news for debtors. Do not be misled by promises that will not be kept. Creditors are not stupid and the really dirty little secret is that the creditors will kick back part of the settlement money to the debt settlement company. I have had people come to me who have lost $10,000.00 or more to these companies. The promises being made by the debt settlement companies are often empty or even lies.
South Carolina does not have wage garnishment for most debts. Creditors cannot get anything from you unless you want to make the creditor an offer. The real question is, why would you want to make an offer.
Your credit is damaged and you cannot get credit. In many cases, you will be better off keeping your cash and not paying the creditors anything. Meeting with an attorney to assess what property you have at risk early may also help you to make a plan as to how you will handle your debts.