Don't succumb to lure of debt settlement firm

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Dear To Her Credit,
My wife and I are in our 70s and have substantial credit card debt. We're barely hanging on. We've recently been approached by a law firm that specializes in debt settlements (not consolidations). Their frontloaded "retainer" will be rolled into and put on top of our final payments. Naturally, there's a 15-17 percent commission also added! And, the final piece of information is that they need a limited power of attorney to make their negotiation magic happen. Their BBB rating is A-. Could I get your candid thoughts? They would be greatly appreciated! -- Barbara


Dear Barbara,
My candid thoughts? Run! You've made a very good case on your own for why you should avoid these types of debt settlement companies. They take too much money. You give up too much control. I would add, you don't need them.

You'd think the BBB rating of A- would mean a business is legitimate and safe. However, the BBB uses its own formulas for determining a letter grade. The grade is influenced by the number of customer complaints, such as whether the business responds to complaints, and how long they have been in business. It's not foolproof, and there's no guarantee even a firm with a high BBB grade can help you settle your debts and eventually become debt free. Use BBB ratings as a starting point, but don't assume an A- rating means you'll be glad you used a company's services.

It's somewhat disturbing that this law firm approached you. Somehow, they have determined that you are in financial distress, and they have set out to rescue you -- at no small profit to themselves. They know that when people are desperate, it's amazing what many of them will sign up for, which is especially tempting if someone comes along and makes it sound like they can throw up their hands and let the experts take over.

Here's how you can stay in control of your money, avoid paying steep "commissions" and settle your debt yourself:

Decide if settling your debt is feasible. To settle your debt, you need to be in enough financial trouble that the creditors are willing to settle, but you need some money to offer as a settlement. You'll probably need to come up with 30 to 40 percent of the amount you owe in a reasonable period of time. You should look carefully at other options, such as paying the debt in full or by filing Chapter 7 or Chapter 13 bankruptcy. In addition, be aware that any forgiven debt may be taxable.

Find cash. To find money to offer your creditors, consider selling something or earning extra income. You may even borrow from a relative or take money from savings. Be careful, however. Don't borrow money you can't pay back. And in most cases, you should leave your emergency fund and retirement accounts alone.

Contact each creditor. Write a letter to each credit card company and other creditors, explaining why you need to settle your debts. You don't need a sob story, but you do need an honest explanation. Many people want to settle their debts, but creditors are only likely to agree to settle if there's a good reason, such as long-term health problems.

Get every settlement in writing before you pay. It's OK to talk to a creditor on the phone, but don't bank on anyone remembering what the representative agreed to after you make a payment. Get the agreement in writing, or the payment you thought would take care of your entire debt could be applied as just another payment.

Follow through. Once you have an agreement to settle, be sure to keep up your side of the bargain. Pay everything you said you would, when you promised you would. Otherwise, you'll be back where you started -- or worse.

You're not desperate, and you're certainly not gullible. You may be barely hanging on, but you haven't lost your grip. Just remember, the debt settlement company can't do anything for you that you cannot do better yourself. 

See related: Do you have what it takes for DIY debt settlement?, Get that debt settlement offer in writing

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Updated: 01-22-2018