Using a debt settlement company
A debt settlement company negotiates with your creditors and offers them an amount of money to eliminate your debt. This amount is often lower than your total debt. If your creditors agree to the offer, you must pay your debt settlement company. The debt settlement company will then pay your creditors.
Some credit counselling agencies may also offer this service.
There are many different names for debt settlement, including:
- debt consolidation
- debt arbitration
- debt negotiation
- debt relief
- debt pooling
- debt reduction
- debt elimination
Creditors don't have to negotiate with a debt settlement company. Your creditors may not agree to lower the amount of your debt or work with the debt settlement company. Be aware that a debt settlement company may still charge you fees even if your creditors refuse the offer. They’re usually for-profit businesses that make money from the fees they charge their clients.
Debt settlement companies don't always provide credit counselling and money management advice.
A debt settlement company may offer to handle all communications with your creditors. They may ask you to sign a power of attorney to give them this ability. Before you sign, make sure the debt settlement company agrees to inform you of all payments they make to your creditors. This allows you to confirm that your payments are being received.
Be cautious when looking for help
Some companies offering help to pay off debt or repair credit are misleading consumers.
What to watch out for when considering a debt settlement company
Be aware that some debt settlement companies may do the following.
Some debt settlement companies offer their services through aggressive telemarketing calls. High-pressure sales practices create a difficult environment to make clear decisions. If you get a call, don't feel pressured to agree to something right away.
Be aware that some debt settlement companies may make unrealistic promises about what they can provide. They may promote their services in a misleading way.
Debt settlement companies cannot:
- guarantee to reduce your debts by a large percentage
- ensure your creditors will always agree to participate in debt settlement negotiations
- prevent creditors and collection agencies from seizing your salary or taking money from your bank account
- stop your creditors from trying to recover the money you owe in court
- stop phone calls from your creditors
- offer legal protection from creditors’ actions like seizing assets
- handle government-regulated proceedings that release you from debt. This is part of consumer proposals and bankruptcies. Only a licensed insolvency trustee can offer you these 2 options
Some companies also offer you a loan suggesting it will help repair your credit score. When you sign up for this type of loan, you may never actually receive any money. The company will tell you the loan amount will cover its services or programs.
You may end up making regular payments to the company to repay the loan. Be aware this type of loan usually has a high interest rate. This service doesn't help eliminate any of your other debts. You'll have to keep making your payments on any other debts you owe. You could be left with more debt and no change to your credit score.
You may have to pay advance fees or monthly fees. You'll likely have to pay the advance fees even if the company can't get your creditors to reduce your debt. Fees charged by debt settlement companies can be very high.
Certain debt settlement companies intentionally delay making payments to your creditors. They do this hoping to get better results in negotiations to reduce your debts. This will hurt your credit score because it may seem like you're less able to repay your debts. Always ask for receipts for any payments they make.
Before you sign up for debt settlement
Make sure you do the following before you sign up with a debt settlement company or agency.
Research the company’s reputation
Do a background check. Find out if there have been any serious or unresolved complaints about the company or agency. This includes late payments to creditors or false advertising.
Check for complaints made to:
Review the contract carefully
Take the time to review the contract and don’t agree to anything under pressure. Ask questions if you don't understand any of the terms and conditions. Make sure you keep a copy of the contract.
Filing a complaint about a debt settlement company
Provincial and territorial governments are responsible for regulating debt settlement companies and investigating consumer complaints.
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