Debt reduction firms - a scam about Unsecured Credit Card Debt Settlement?

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Q. What is the deal with these "debt reduction" firms? I guess what they do is have you stop paying your credit card bills, then after 6 months or so they negotiate with the credit companies to get your debt reduced and set up a payment plan. Supposedly they can get your debt reduced to about 60% and get you debt-free in about 2 years. Of course this must completely trash your credit rating, but is it worse than bankruptcy, in its long-term effects? Can the credit card companies take legal action? I know it must sound bizarre but I am 45 years old and just woke up to the realities of my financial situation. Pathetic, I know. But I've started reading Motley Fool and have created a budget and am trying to live within it, but I am suffocating under the debt load. As near as I can figure right now (I just started doing this about 3 weeks ago) I am running about a $1000/month deficit. I'm sure I could use a financial planner, but don't want to spend the money! I know, if I had a toothache I'd spend the money on the dentist, etc. Anyway are these debt reduction firms for real?

A. Having thought through this with several of my peers, and having graduated college with what appears to be the required overload of credit card debt (took me five years to crawl out), I know what you're going through and have some thoughts on the subject. First - Banks are in the business of making money. So are the firms that help you get out of trouble with banks. I love free enterprise, because it keeps the playing field MORE level that it would be without this economic freedom we enjoy. Second - Banks, and other lenders, have large budgets to lobby Congress to massage the laws for their benefit. Most people don't have that ability. Third - There are no laws that prohibit lenders from OVER loaning. They can freely bury you in debt, and make mega bucks in the process. I've actually done some research on this. Back in the good old days, when you applied for a charge card or credit card - or even a checking account - the financial institution would do a thorough background check. This included CALLING your personal references that were required on the application - friends, family, neighbors, co-workers, etc. They were stingy with credit limits until a borrower proved their ability and willingness to repay loaned funds. This has changed. Now, they check your beacon/empirica scores, and look at your credit, and that's about it. The debt to income ratios they use as maximums are ridiculous, and are one of the primary reasons for the massive number of personal bankruptcies. In a perfect world, there would not be much need for credit counseling, but we live in an imperfect world. The rules are there, so do not cringe from using them to your benefit, because that is one of the economic freedoms you enjoy. The firms that use the laws to your advantage, by disputing every negative item on your credit are for real. I have sent clients to them. The better ones are usually law firms that have carved out a niche. They know the law, and exploit it for their clients benefit. There is nothing wrong with this. Why? Banks exploit the law to their maximum advantage, and they lose not one wink of sleep for screwing you by extending you too much credit. I speak on campus from time to time, and I am disgusted with what I see on campus - credit card apps on every bulletin board and booths in the student unions with people soliciting credit card apps. It is not surprising that so many college students get buried and start a lifetime habit of overspending money and then paying out the wazoo for the priviledge. They suckered me once, and now I warn people about how painful getting out can be. I pay cash for everything these days, including cars. It takes a while, and when I was younger, I had to downsize my lifestyle for a few years, but now I'm better off and much happier. Part of the economic freedom we enjoy is the right to fail. The fact that banks and other financial institutions encourage this is a fact of life that we must deal with. Using the laws they helped write to your advantage is GOOD, in my opinion. Here's what I would do: 1. Pay unsecured debt off as fast as you can. 2. Settle those that you can't afford to pay. Some argue against this, but it is an ethical action, in my opinion, and it gets them off your back. 3. Do EVERYTHING within the law the remove ALL negative items - and if that includes hiring a firm that does this with ALL THE RUTHLESSNESS with which the lenders use to get you overextended, then SO BE IT! When your credit is restored, and your debts paid, protect yourself and your family by being EXTREMELY CAREFUL when using debt. Never again be cavalier about getting a new TV, car, or other items by using credit simply because you have some still available on a card.

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