This is very true. From people I have spoken with, what these companies do is negotiate a payment plan with your creditors for a one-time specific payment that they distribute. The problem lies with when something goes wrong or you wish to make changes. What appears to happen when you make arraingements with these companies is that you are giving up your right to negotiate with your creditors. So, if you are late, or miss a payment, or cannot use the system anymore, you end up screwed. Your creditors won't work with you and neither will the company. It's definately a scam.
Santa
It's worse even than that.
Typically these debt negotiation companies tell their customers to stop paying their bills and to divert that money into an escrow account that will later be used to offer settlements against their debts.
What happens then is any credit accounts will become delinquent, default to the highest interest rate allowed under the contract, and late charges will start accumulating. Over the limit penalties may accrue as well. At this point balances grow rapidly. If the debt negotiation company is successful in settling the debt later on, there is no guarantee that the dollar figure of the settlement will be less that was was owed before the creditor stopped paying.
Typically consumers who seek the help of these debt negotiation companies have many credit accounts. It's common that while the debt negotiation company targets one or two accounts, the remaining accounts are ignored completely, and these creditors sue the debtors and get judgments. Once judgments are obtained, garnishment of wages is the next step. Typical wage garnishment is 25% of the consumers income, which usually a lot more crippling than if the consumer had just worked out a payment plan with the creditor.
And finally, the damage done to the consumer's credit is unbelievable.
In general, settling a bad debt isn't so bad. If the debt was already in collections, a settlement at least gets it paid off so it can begin to age and be less influential on a consumers credit score. When debt settlement companies settle multiple debts, their programs can take years. That's years with open collection accounts on the credit history, often turning into open judgments. Few things are worse for a consumers credit than bankruptcy, a debt negotiation company settling multiple accounts over a period of years is one of them. The very worst credit scores I've seen, and I've seen a lot of credit reports, are from people who have tried these companies.
All in all the only person I'd recommend one of these companies to is someone who only has a small number of credit accounts to settle and really feels they're unable to talk to the bill collector themselves. Everyone else would really be well advised to either try to work out their problems with their creditor, or just file bankruptcy and get it over with.
