Are Credit Card Debt Settlement Companies Legitimate?

Credit card debt settlement is not a new phenomena, but it has become more prevalent with the recent economic downturn. When you see commercials and ads online that seem "too easy", or "too good to be true", you might want to take a moment to pause. While I won't make a blanket statement saying these companies do not provide any real value, many border on shady, and some are downright scams.

Just take a look at what happened in Alabama with the Debt Settlement company, Allegro Law Debt Settlement. They were found to be scamming many of their clients out of thousands of dollars, leaving them with two to three times the debt they had before, only now facing lawsuits from creditors that had not been paid in almost a year. Fortunately, they were shut down by an Alabama Court, and hopefully their clients will get some of their money back.

How Debt Settlement Works

Debt settlement works by building up a lump sum of cash in hopes of "buying off" credit card debt with one large chunk of cash. Where does the cash come from? That's the easy part, the debt settlement company tells their clients to stop paying their credit card bills, and instead, give the money to them to save in a trust account.

It takes anywhere from 6-12 months before enough cash has been saved up to begin the settlement, or negotiation process. Of course, the debt settlement company takes their fees first, regardless of the outcome for their client.

Once enough cash has been saved in the trust account, the debt settlement company will attempt to "settle" the outstanding debt for a lump sum of cash. If the credit card companies accept, then the settlement is done. The downside is, that many credit card companies are learning that it's more effective to simply sue for the full amount than continue accepting partial payments.

What Happens During the Collection Months?

During that 6-12 months, the credit card companies are receiving no payments and will begin going after the consumer to get their money. It doesn't take too long before lawsuits are filed demanding not only the money owed, but also attorney fees and court costs.

Many people wind up in court, for what was a $5,000 credit card balance, now being sued for $12,000 or more.

It's a Dangerous Alternative to Bankruptcy

While nobody wants to throw in the towel and file for bankruptcy, using a debt settlement company is a risky proposition at best, and a financial death blow at worst. Most people who wind up on the losing end of a credit card debt settlement effort choose later to file for bankruptcy protection. That means, all those monthly payments were wasted, because if bankruptcy had been considered earlier all credit card debt would have been discharged months ago, the lawsuits would never have happened, and they would be back on track instead of back where they started.

Talk to a Bankruptcy Lawyer First

Even if you have no intention of filing for bankruptcy, an attorney can advise you on your other options, and in many cases, can offer debt settlement services for much less money than a debt settlement firm and without much of the risk of using a high-volume company.

Talk to a Bankruptcy Lawyer to find out if bankruptcy can help you get back on your feet. If you find out that bankruptcy is a good option for you, you will be done in 90 days, you’re credit card debt will be gone, you’ll be protected from any collection attempts, lawsuits and foreclosure by the U.S. Bankruptcy Court, and you’ll be able to start over with a clean slate and begin rebuilding your credit and your financial situation.