This is one of the truths in the Money Myths chapter of Dave Ramsey‘s Total Money Makeover.
And born out in the experience of my clients, though they often think that debt collectors are our friends.
Recently, a client, sat across from me and said she liked the guy at thecompany.
That was my description after her description of her experience.
She was sending some $600 per month to this outfit.
“But he sounds so friendly on the phone!”
Well, hey, he lives off a percentage of the money you send in, of course he sounds nice.
He is the counter point to his competition, the collection agency jerk who yells and swears and intimidates.
Now, who wouldn’t rather send money to a nice guy than a jerk?
The problem is not their telephone manners, it is what they do with your money.
They keep it. Most of it.
This client said they had kept over $5,500 of the $6,000 she had sent in.
Capital One was suing her even though that was one of the creditors she gave them to settle for her.
Here is the deal:
You send monthly payments to these debt settlement companies.
They do not even talk to your creditors until they have a set amount, of your money, in their bank account, five or ten thousand dollars, maybe more.
In the meantime, you can be harassed, sued, garnished, whatever your state law allows.
And they pay themselves up front, out of the first funds you send them, so that money does not even get into that debt settlement fund.
Read the fine print, not what you are being told on the phone.
And many of these companies have an internet presence only, no brick and mortar office.
Makes them hard to sue after they screw you.
If they do settle a debt, you may get a 1099 for debt forgiveness income from the creditor.
Say VISA takes 5,000 on a 15,000 debt.
They tell the IRS you have $10,000 of income, by forgiveness of that debt.
You may or may not be liable for tax on that, I AM NOT A TAX LAWYER, consult your tax adviser if you are in this situation.
But let me know if anyone was told of this possibility up front by one of these outfits.
And they are hitting the airwaves hard, as changes in the law are coming soon that will make it harder for them to rip you off.
Get a free consultation with a lawyer, about your options.
Debt Collectors Are NOT Your Friends