While I am a big fan of debt settlement as an alternative to bankruptcy, I strongly believe that the do-it-yourself approach works better for consumers than using a professional debt settlement company. I hasten to add that I have nothing against third-party debt settlement companies. Many of them do a good job for their clients, and in fact I personally know a number of the owners and executives in this industry. Most of the criticisms of the industry are misplaced, and are usually put forth by people associated with credit counseling. In other words, the criticisms are usually from a source that is biased at best, and actively hostile at worst.

The critics usually display ignorance when it comes to any understanding of what the debt settlement industry is actually all about. Debt settlement is an alternative to bankruptcy, period. Once this is understood, most of the criticisms miss the mark by a wide margin. For example, it is widely stated that settlement companies “ruin people’s credit.” Excuse me? The client was already there, starting to miss payments, and headed off a financial cliff. I have personally talked with consumers who had more than $100,000 in debt and still had a good credit score. But they had only been able to keep up the $2,500 in monthly payments by using one card to make payments on the others, doing the credit card shuffle until the house of cards came crashing down. What the critics don’t realize is that most people who turn to debt settlement simply cannot keep going down their present path. The money simply isn’t there. They just don’t have the monthly cash flow to make it happen. Criticizing a settlement company for ruining someone’s credit when they are already in this situation is like complaining that a doctor doing open-heart surgery to save a patient’s life will leave a nasty scar behind. It’s simply part of the cure.

If I am in favor of debt settlement and have nothing against the companies providing this service, why do I recommend the DIY approach? There are several reasons, but the one I will concentrate on in this post is FEES. I’m not opposed to companies earning money for their services. I think the whole “non-profit” thing is largely a trick on consumers anyway, and I believe that for-profit companies are in a better position to pay a decent salary to their staff. No, my beef is not with the existence of fees in general. Rather, what I object to is the TIMING of the fees, as well as the sheer SIZE of the fees. Let’s say you owe $50,000 in debt. Most settlement companies will charge around 15% of the enrolled debt, so in this example, that’s $7,500 in fees. Frankly, that’s simply too big a number. But the timing of how those fees get collected makes the problem even worse. That’s because most companies FRONT-LOAD the fees. So that $7,500 would be deducted from the monthly program payment over a 10-18 month period. Let’s say the company collects the $7,500 over 12 months. This results is fee payments of $625 per month. Where’s the money to settle the debts with? A typical client who’s $50k in debt would pay into the program at around $750 to $1,000 per month in order to build up funds for settlements. That leaves only $125 to $375 per month building up toward settlements. At the end of that first year, the $7,500 in fees are fully paid, but the client has only saved $1,500 to $4,500 against $50k of debt. (Actually, it’s worse than that, because the debts will probably inflate to at least $60,000 during that period, due to all the interest, lates fees, and penalties.)

The big problem here is that some of the best deals happen right before charge-off, which is usually in the 6th or 7th month of the program (assuming the client was current or near-current at the start of the program). So this means that some of the best deals cannot be taken, because too much money has gone to fees and not enough toward savings for settlements. In the old days, the fees were on the back end, charged only AFTER successful settlement. We used to negotiate the first settlement, charge a percentage of the savings, and then start building toward the next settlement. This was much better for the consumer, but it’s tough to find a company out there that still charges this way. There are a few still operating with this contingency system, but even those companies charge 4-5% up front, plus monthly fees. So the original advantage of this type of program has been eroded by the steadily increasing fee structure of the industry.

Since the front-loaded fee structure, or variations on it, have become the norm, it makes good sense for a consumer to bypass those fees entirely by taking matters into their own hands. If it were not possible for consumers to negotiate on their own, that would be one thing, and those front-loaded fees would be justified. But the opposite is the case. Creditors routinely settle directly with consumers, and in fact PREFER to deal directly with the consumer without any third-party intervention. Most of the clients whom I’ve coached on how to do their own settlements are shocked at how easy it really is. In fact, in a lot of cases, it happens automatically as the account gets close to chargeoff. So the message here is simple: Save the fees by doing it yourself. You’ll get out of debt faster as a result, because 100% of your money is going toward debt reduction and none of it toward fees.