by Denise Hall
If you're considering using a debt settlement or debt consolidation service to help you get out of debt quicker and lower your monthly payments, be sure to do your homework before choosing a debt settlement company because there are definitely lots of scams and shams and out there.

Let me begin by saying that debt settlement / negotiation and debt consolidation are not the same thing, which most people don't realize. Debt settlement companies may charge you an initial "admin fee" of hundreds of dollars simply to set up your account, plus a monthly service fee. The fees often vary depending on the company in question and the total amount of your debts. Such companies gladly take your money each and every month, but fail to make the monthly payments to your creditors!

Instead, they simply put your money in a trust account, negotiate your debts with your creditors, and then make a single lump-sum payment when there's enough cash in your account to pay a creditor off in full. That approach can take several years depending on the amount of debt you owe to each creditor. Meanwhile, your creditors can sue you and your wages can even be garnished!

Debt settlement companies often don't ask your creditors to stop the interest, over-limit fees, and late fees from accruing. That means your bills will continue to grow while the negotiations are ongoing, so if you're hit with a lawsuit and a judgment is levied against you, you'll owe more money than when you started the debt settlement process! And shoddy companies, of which there are many, don't tell you any of this up front. I like to call it "getting your permission by omission" because they don't explain to you how their program works before you sign an agreement with them.

Or afterwards, for that matter. But if you know which questions to ask, eventually you'll figure it out. Let me give you an example of how debt settlement typically works: Let's say you have racked up $20,000 in unsecured credit card debts. You owe $10,000 to one credit card company, $6,000 to another one, and $4,000 to a third one. You agree to contract for a five year debt settlement plan where you pay $250 a month to the settlement company. Sounds good, right? After all, $250 a month for five years is only $15,000, so you're saving $5,000 and you'll be debt-free in just five years, right?

Let's examine this arrangement a bit closer. The admin fee will cost you $750 up front. Your first three monthly payments go towards that admin fee and nothing gets put into your trust account until your fourth monthly payment has been paid. The settlement company takes the first $50 of your $250 payment every month as the service fee. That means that only $200 a month is actually being added to your trust account. Most debt settlement companies will claim to be able to settle your debt for about 1/2 of what you actually owe, so let's use the lowest credit card debt as an example:

If you owe $4,000 on the account and the creditor agrees to accept $2,000 as payment in full, it will take you ten months at $200 per month to have accrued enough cash in your trust account to pay off just that one credit card bill. But remember, your first three payments to the debt settlement company only paid the $750 admin fee. That means your first credit card isn't really settled until 14 months after you started sending them money!

So what is the problem? It's really very simple - Your creditor won't agree to accept half of your actual debt amount in settlement unless, or until, that amount can be paid in full. Otherwise, they'll expect you to make your normal monthly payments. Since you don't have the $2,000 sitting in your trust account, and you won't have the debt settlement amount until over a year after you quit paying the creditor directly, they'll probably sue you and ask that your wages be garnished long before you have accrued that $2,000.

But what about the other creditors? They'll be waiting a lot longer to get their money from the debt settlement company! The $6,000 credit card debt will take 15 more months to pay off, assuming your creditor waits that long to receive their 50% settlement. And the $10,000 account? Well, you do the math. If, on the other hand, you signed up for a three year plan with the debt settlement company, your debts would be paid off quicker than with the five year plan.

But would your creditors wait that long to get their money? I doubt it. You can actually negotiate with your creditors on your own. Most are practical, and will agree to accept a smaller monthly payment from you and halt all interest and fees from accruing. And, of course, you'll save the thousands of dollars in fees that you would pay to a debt settlement company. Before signing up for any debt settlement service, be sure you check out the company thoroughly.

There are some good ones out there, but you have to do your homework. The web is a great place to start. Remember, there are definitely reputable debt settlement companies out there, so keep looking until you find one.

Denise Hall is the owner of Home Business On A Budget specializing in tools and resources for your home business needs.

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