6 On Your Side Answers: Why you should avoid debt settlement firms

KNOXVILLE (WATE) – Millions of people struggling with credit card debt are vulnerable to signing up with companies that promise quick relief from debt. Often they find themselves further in debt.

Betty in Jefferson City asks: “I’ve heard commercials by debt settlement firms. Are they a good deal?”

Martha Harris told us in March 2013 she had made a mistake of relying on a debt settlement company to help her pay off nearly $16,000 in credit card debt. Instead, she went further into debt after paying the debt settlement company a monthly fee and being told to stop payments to her card holders.

The Center for Responsible Lending has found that despite legislation passed four years ago that prohibits debt relief or settlement companies from collecting advance fees, the practice still goes on.

A report by the Center for Responsible Lending says some debt settlement firms are using loose affiliations with law firms to circumvent the Federal Trade Commission’s fee ban.

That 2010 law says debt relief companies can not sell their services over the telephone by charging a fee in advance before settling or reducing a customer’s credit card debt, which is exactly what Martha Harris was doing.

Debt settlement firms generally require you to default on your debts. As a result, according to the Center for Responsible Lending, that leaves you vulnerable to penalty fees, potential lawsuits and damage to your credit score.

On the other hand, the American Fair Credit Council, a debt settlement trade association, says legitimate debt settlement companies are complying with the federal government’s advance fee ban.

The council says firms associated with its trade group probably accept no more than 20 percent of the people who apply for debt relief.

We have reported over the years how debt management services like Clearpoint Credit Counseling in Knoxville offers a safer alternative to debt settlement services.

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