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What Debt Settlement Companies Don't Tell You

Last week we heard an American debt settlement company advertise on a Canadian radio station. In their radio ads, this company said it could help people who are struggling with debt, but they never mentioned the name of their company. We thought this was strange, so I gave them a call to find out who they are and how they are offering to help people. Here is what Sandy, their representative, said they could do for me:

What they told me

  • Their “expert debt negotiators” would help me “get completely out of debt in 12 to 48 months” if I agreed to go on their Debt Settlement Program. I would make monthly payments to a new account they would setup, and once there was enough money in the account, they would begin to offer settlements to my various creditors.
  • “The worst case scenario” would be that I would only have to repay 45% of my debt—even if I was not behind on my payments.
  • Sandy claimed that they helped an NFL football player who earned $500,000 a year settle his credit card debts for only 18% of the amount he owed.
  • I asked why the banks would agree to this since I wasn’t late on any of my payments. Here are Sandy’s answers:
    • Her company’s expert “debt negotiators” are “pretty much on a first name basis with all the credit card companies and major banks” and they “will” settle all my debts for at least forty-five cents on the dollar.
    • Since I have carried a credit card balance for some time, “most of the money” I am paying on my credit cards every month is “just paying off interest.” So “the credit card companies really don’t lose anything.”
    • Sandy said that she had previously worked for a major credit card company for 13 years so she “knows” how the system works.
    • They claim to have a “100% success rate.”
  • Sandy told me that I wouldn’t qualify for bankruptcy even though she didn’t ask me one question about my income or my assets which are really important factors when deciding what to do about debt. All she asked about was the amount of credit card debt that I had.
  • This “program has been around for 35 years.” Their company “has been doing this for 20 years,” and they’ve been operating in Canada for 6 months out of Toronto (even though my phone call was handled through their Florida call centre).
  • I don’t have to worry about collectors calling me while I’m on their program because they have a “cease and desist letter” that I can send to my creditors to stop all collection calls.
  • Sandy claimed that they have “thousands” of actual “success stories” on their website.

What they didn’t tell me

  • They are not licensed to conduct business in my province. I called my provincial licensing body to find out (all provinces require debt settlement companies to be licensed as “Debt Collectors” or “Debt Poolers”).
  • They have an F rating with the Better Business Bureau (BBB). The BBB assigns businesses ratings on a scale of A to F, and F doesn’t mean “fabulous”!
  • I did a Google search for this company, and they appear to be the subject of many lawsuits.
  • Federal regulators in the United States are considering coming down hard on the whole debt settlement industry for their unethical business practices.
  • Creditors consider settlements on a case-by-case basis and only people who are in extreme circumstances, often with very bleak future income prospects or devastating medical conditions can hope to have a settlement offer of 45% (or less) accepted by their creditors.
  • For a creditor to accept less than full payment on a debt there must be a good reason. Circumstances where it can make sense to settle debts vary but can include illness or job loss.
  • If you stop paying your creditors and stash all your money in some “new account” creditors will hand your debt over to collection agencies who will call you persistently. It is possible to stop collection calls, but that doesn’t stop a creditor’s collection activities. Money in an account with your name on it may be used to pay your debt (if your account and your debt are with the same financial institution). Creditors can take you to court and seek a judgment against you, and once they get a judgment, they can then put a lien on your house or even garnish your wages.
  • No one can tell you that you don’t qualify for bankruptcy if they don’t know what your income is. A qualified Credit Counsellor or Trustee would look at your whole financial situation to see if bankruptcy is a viable option for you.
  • This debt settlement company doesn’t have “thousands” of success stories on their website. They have dozens—maybe even a hundred—individual debt settlement agreements, but not thousands of "success stories."
  • Sandy never brought up the subject of me taking responsibility for my financial situation. She didn't appear to be the least bit concerned about how I accumulated my debt. For all she knew I could have racked up all my debt in Las Vegas, yet she was essentially encouraging me to take advantage of the companies who had lent me the money. The fact that I can afford my payments and have never been late on any of my payments didn't matter.
  • There are always ways to try to beat the system, but they usually don’t work. This is another good example of the old saying, “there is no such thing as a free lunch.”

Factors that reputable debt settlement organizations consider when they help clients settle their debts:

  • What is the reason for settling the debts? What has happened to make paying the debts off in full so difficult?
  • Offering a settlement requires a lump sum of money. How much money do you have available for the settlement offer?
  • Where are the funds coming from (friends or family, refinancing, inheritance or RRSPs)?
  • Are you aware of the impact on your credit rating if you settle your debts?
  • What will you do if only some of your creditors accept the settlement offer?

An ethical debt settlement organization will conduct a full financial analysis and look at the whole picture before they commit to helping a client with a settlement offer.

I am not trying to pick on Sandy or vilify the organization that she works for (that is one reason why I haven’t named them). However, based on my phone call with Sandy and what we see happening south of the border, we are very concerned about how these American debt settlement companies are doing business in Canada and how this may adversely affect the lives of thousands of Canadians.

If you or someone you know needs help with their debts, here is a list of reputable, accredited non-profit organizations that can help.

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