US Financial Management, Inc.

Be weary of some of the schemes debt settlement companies use to take your money.

Debt settlement companies may charge you an initial "admin fee" of hundreds of dollars simply to set up your account, plus a monthly service fee. The fees often vary depending on the company in question and the total amount of your debts.

Such companies gladly take your money each and every month, but fail to make the monthly payments to your creditors! Instead, they simply put your money in a trust account, negotiate your debts with your creditors, and then make a single lump-sum payment when there's enough cash in your account to pay a creditor off in full.

This approach can take several years depending on the amount of debt you owe to each creditor. Meanwhile, your creditors can sue you and your wages can even be garnished!

Debt settlement companies often don't ask your creditors to stop the interest, over-limit fees, and late fees from accruing. That means your bills will continue to grow while the negotiations are ongoing, so if you're hit with a lawsuit and a judgment is levied against you, you'll owe more money than when you started the debt settlement process.

Shoddy companies, of which there are many, don't tell you any of this up front. I like to call it "getting your permission by omission" because they don't explain to you how their program works before you sign an agreement with them. But if you know which questions to ask, eventually you'll figure it out.

Let me give you an example of how debt settlement typically works:

Let's say you have racked up $20,000 in unsecured credit card debts. You owe $10,000 to one credit card company, $6,000 to another one, and $4,000 to a third. You agree to contract for a five year debt settlement plan where you pay $250 a month to the settlement company.

Sounds good, right? After all, $250 a month for five years is only $15,000, so you're saving $5,000 and you'll be debt-free in just five years.