Debt settlement companies, sometimes known as debt negotiators or arbitrators, can make the path to financial freedom sound appealing, but the reality may be very different from the rosy picture painted by the commercials, said Kristen Garrett, spokeswoman for Advantage Credit Counseling Service, Pittsburgh.
Such companies typically charge significant fees, such as a percentage of the total debt – often in the 13 percent to 20 percent range – or they may base their fees on the amount of debt reduction they can negotiate. Garrett said the companies often collect a large portion of that fee before the individuals they work with receive any benefits.
Local attorneys who specialize in debt relief and bankruptcy say consumers should be wary.
“Anyone who offers a secret plan to help you get out of debt, you should know that should be a plan that will not work,” attorney David M. Axinn of Duncansville said. “I see a lot of people waste their money on get-out-of-debt schemes and still get sued and harassed.”
Attorney Charles Bierbach of Huntingdon has seen similar problems.
“I have had clients who poured a lot of money into them and aren’t any better off than the day they contacted them,” he said.
If people are experiencing problems in paying their bills, the best thing is to get help.
Garrett advised people not to delay when they start to struggle. She said the sooner they seek help, the better.
While some believe debt often is from mismanagement of money and overspending, that is not always the case.”The loss of a job is huge; that is the major problem,” attorney Shawn Cohen of Duncansville said. “People losing their jobs are without health care, and they use their credit cards to pay the medical bills. It is not always over-spending. That is a bad misconception.”
April Lewis-Parks, director of education for Consolidated Credit said many people who are laid off and have lost their income turn to their credit cards to make ends meet.
People in financial difficulty should contact a credit counseling service or an attorney who specializes in debt relief.
Garrett advised people to look for a debt relief service that offers an educational component.
“Before we can tell if a debt management program will work, we go through a counseling program to talk about your situation,” she said. “Our mission is to provide you with the education to get you out of debt and back on track.”
Lewis-Parks said bankruptcy is an option, but it shouldn’t be a first step.
“Bankruptcy was created to help people in dire straights who had no other means to go on with their life. I would first tell them to call a counseling service and speak to a counselor to assess your situation and get some advice,” she said. “Sometimes, it is the only option, but they should reach out to someone like us and get another opinion first.”
The number of people filing for bankruptcy nationally has increased greatly – from 822,590 in 2007 to 1,074,225 in 2008, Bierbach said.
The numbers also increased for those filing for bankruptcy in U.S. Bankruptcy Court for the Western District of Pennsylvania, jumping from 11,702 in 2007 to 12,539 in 2008.
While bankruptcy is an option, it may not be the best way to go.
“I let people know bankruptcy is one of many things you can do to manage debt,” Cohen said. “It is a method to eliminate or modify certain debts [credit card and others] and terms of debt.”
Cohen said the stigma once associated with filing for bankruptcy is not the same as it was years ago. He said people of different financial, social and economic levels have used bankruptcy to get through a difficult financial situation.
However, he cautioned that while filing for bankruptcy gives people a fresh start, it is not always easy. He said it can cause people a lot of psychological stress.
“I think some people have the misconception it is easy to go through and easy to get rid of. Bankruptcy should be a last option if you can’t find a way to pay off your debt in a timely manner,” Garrett said.
Garrett also said people who have gone through bankruptcy may encounter some difficulties.
“Lenders are skittish. If you are buying a car, you may have to pay a higher interest rate or make a larger down payment or even have a co-signer,” she said.