Anthony Chester, Esq
According to the most recent data from the Federal Reserve, the average credit card debt of American families is $6,270.
The weight of this debt, and the ever-increasing balance due to interest, can feel overwhelming.
For some consumers, interest rates on those debts can be as high as 30%, leading to a downward spiral of debt, stress, and financial strain. As a result, many people look to debt settlement companies who promise relief and financial independence.
Unfortunately for consumers, these companies' promises are often too good to be true.
Debt settlement companies sell the idea that they can get you out of debt quickly and for a huge discount on what you currently owe. They promise results and assure people of the ease and convenience of their “risk-free” services.
Understandably, this possibility can be incredibly appealing to people looking for a way out of debt. What these debt settlement companies don’t mention is that their “strategies” often carry huge negative consequences for consumers and that, in some cases, the conduct these companies engage in is illegal in Minnesota.
While there are variations of how debt settlement companies operate and how they achieve settlements with your creditors, the most basic strategy that many companies use is to cause you to default on your debts, allow those debts to reach a charge off status, and then hope that they can negotiate a lower settlement on your behalf to resolve the debt—all while charging huge fees to do this “service”.
What these debt settlement companies gloss over is that defaulting on your debt can cause significant damage to your credit score—and may stay on your credit reports for up to seven years.
Even worse, if the debt settlement company is unable to achieve a settlement with a creditor, oftentimes the creditor chooses to simply sue the consumer: getting a civil judgment against the consumer for the full debt, interest, and late fees, plus any applicable court costs.
In that worst case scenario, the debt settlement company may actually cause the debt to grow, not reduce, and cause a consumer to have a publicly searchable judgment in their name.
Minnesota's Unique Law Protecting Consumers
Because of these dangers for consumers working with debt settlement companies, Minnesota has enacted a state statute (Minn. Stat. § 332B) to protect Minnesotans.
For example, debt settlement companies in Minnesota are not allowed to do the following:
Charge up-front fees
Tell consumers to stop paying their creditors
Tell consumers that the debt settlement company will protect them from interest, fees, collections, lawsuits, or garnishments
Tell consumers that the debt settlement company will improve their credit score
Tell consumers that the debt settlement company can negotiate a better deal than the consumer could without the debt settlement company
Fail to warn consumers, in writing, of many of the items above
Fail to warn consumers, in writing, that they cannot guarantee reduction or elimination of debt
Provide or offer to provide legal services unless the person providing the legal advice or services is actually licensed to practice law in the state of Minnesota.
Because Minnesota wants to protect consumers from unscrupulous debt settlement companies, Minnesota also requires that debt settlement companies be licensed with the state. In fact, it is unlawful for debt settlement companies to operate in Minnesota without a license.
Before you contract with a debt settlement company, consider the risks, as many debt settlement companies do not fully disclose how their services may actually harm consumers.
If you are in a situation where you have contracted with a debt settlement company and you feel they’ve broken the law or taken advantage of you, please reach out to us for a free consultation on whether or not your rights have been violated.
Understanding Debt Settlement vs. Debt Consolidation: Which Option is Best for Minnesota Consumers?
Dealing with mounting credit card debt, medical bills, and other unsecured debts can leave Minnesota residents feeling trapped in a cycle of financial hardship.
Fortunately, there are debt relief programs available to help manage your financial situation.
However, it's important to understand the difference between debt settlement services and a debt consolidation loan to make the best decision for your specific needs.
Debt Settlement Services
Debt settlement involves negotiating directly with creditors to settle your total debt for less than what you owe. Companies offering such services typically require you to stop making monthly payments to creditors, allowing your debt to reach a charge-off status.
During this time, the funds you would normally use to pay your creditors are instead accumulated in a special account.
Once enough money has been saved, the debt settlement company attempts to negotiate with creditors to resolve the debt for a reduced amount.
However, this process is risky and may lead to legal action if creditors choose to sue for the full amount owed.
Additionally, debt settlement can severely damage your credit score, making it harder to qualify for new loans or lower interest rates in the future.
Debt Consolidation Loans
In contrast, a debt consolidation loan allows you to combine multiple debts into a single monthly payment, often with a lower interest rate. This approach simplifies your finances by turning multiple payments into one, potentially reducing the overall cost of your debts over time. For Minnesota consumers struggling with high-interest unsecured debt, this can be a more stable option that doesn't involve the risks associated with debt settlement.
However, to qualify for a consolidation loan, you'll typically need a decent credit score and sufficient income to cover your new payment plan.
Key Differences to Consider
Impact on Credit: While debt settlement may reduce the total debt you owe, it often comes with severe credit score damage and potential lawsuits from debt collectors. On the other hand, debt consolidation loans can help you manage payments without hurting your credit as much.
Fees and Costs: Debt settlement companies usually charge hefty fees, which can eat into the money you save. In contrast, a consolidation loan may only involve lower interest rates and manageable monthly payments.
Long-term Financial Health: While debt settlement may seem like a quicker fix, it carries risks that can worsen your financial situation. Minnesota debt relief programs like credit counseling and debt consolidation may be more beneficial for long-term financial stability, allowing you to pay off your debts while preserving your credit score.
Before opting for debt relief services, Minnesota consumers should evaluate all their options, including consulting with a bankruptcy attorney if necessary.
Whether you’re considering debt settlement or a consolidation loan, it's crucial to fully understand the impact on your financial planning and the potential consequences.
For those struggling with debt in Minnesota, exploring state-specific resources and consulting with licensed professionals can make a significant difference in achieving a debt-free future.
