Psst! A hot tip on debt elimination companies: They're bogus
Dear Opening Credits,
Last night I was at the airport and overheard a conversation. The man behind me at the bar was telling the girl at the other table that he hired a service to eliminate his debt. He said he paid $49 to get rid of it all. She was like, really they can do that? And he said yes, and it's not even on his credit report anymore. He said it's much better than bankruptcy and totally legal. Can this be right? I was too embarrassed to turn around and ask him for the company name but I can use it if it is legitimate. Do you know? -- Sarah
Oh, yes, it's totally true. That guy knows the secret, and here is the name of the company so you, too, can ...
Yikes, of course not! My first tip of the day is this: Never take financial advice from random strangers. Avoid them even more assertively if they're boozing it up and boasting about nonsense to other random strangers in airports, train stations and bus depots.
While it is possible that this gentleman did turn to a "credit repair" company to help him with his debts, it is more probable that the service isn't on the up and up. Any business that claims to remove accurate and current information from a credit report is operating illegally.
Here are more key facts about your responsibility and ability to walk away from liabilities:
- You are obligated to pay balances back. When you borrow money from a financial institution, you're under contract with that lender. If you don't follow through, you're breaking that agreement. They then have the right to sue you for the money you owe.
- You can try to negotiate a reduced sum. These are called debt settlements and you may arrange one by yourself or with assistance. They aren't guaranteed, though. Again, your end of the contract is to repay what you borrowed -- not less. Also, the break may not be as fabulous as it sounds. A forgiven amount over $600 is treated as income by the IRS, so your tax bill may be higher than expected. Your credit report will indicate a settlement, and that isn't great either.
- Bankruptcy can eliminate unsecured debts. Chapter 7 bankruptcy exists for qualified individuals who cannot repay their financial obligations. If it's right for you, then pursue it. If it's not, don't. You can ascertain the difference by reading our 7 point pre-bankruptcy checklist.
- They can't take blood from a stone. In the event you have no assets or income, and don't expect to either, there isn't much the creditor can do to lessen its losses. If that's the case for you, even paying the bankruptcy filing fees might be a waste of your resources. You may need them to keep the lights on.
- Time may be on your side. There are only so many years that a creditor has to take you to court for a delinquent account. Check out the statute of limitations for your state. If that time frame has lapsed, you have escaped a lawsuit. It may still be listed on your credit report if the statute is less than the seven years that allows a negative item to appear, but after that, you'll be in the clear.
To be clear, I am not completely opposed to hiring a company to assist you with debt settlement, which is much different than debt elimination. There are some decent ones and they can relieve you of the DIY burden. The better firms take on the duty of negotiation with your creditors, and only charge a percentage of the amount that they save you -- after they've done the hard work. They may also help you remove inaccurate or old data from your credit reports. Still, this is something you can do for free and fairly easily by disputing inaccurate information with the credit bureaus.
But a magic debt deletion company? Nope. And I must say that it irks me when people put more time and energy in trying to wheedle their way out of their legitimate debts then they do just doing the right thing from the get-go. Paying for things you already bought and used is no fun, but that's what you signed up for when you initially took the funds from the lender.
So that begets my second tip of the day: If you don't want to deal with debt or creditors, don't borrow more money than you can easily (and happily!) repay in the first place.
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Published: January 8, 2014
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