What you should know before you contract a debt settlement company.
When you have more debt than you can manage, working with a debt settlement company to erase your debt may seem like a smart idea. After all, there are lots of advertisements that suggest a debt settlement plan can help you eliminate debt for a small fraction of what you owe.
While hiring a debt settlement company may be effective for some consumers, there are significant risks and drawbacks that you should know about before you sign any kind of contract. Having a clear picture of debt settlement pros and cons can help you avoid a decision you may come to regret.
How a debt settlement company works.
So, how does debt settlement work to eliminate debt? When you sign a contract with a debt settlement company, you’ll stop making payments to your creditors and will send that money instead to an account with the settlement company. After a number of months, when you have a large amount of back-owed payments, the debt settlement company will make an offer to your creditors to settle your debt for some portion of what you actually owe them, using the amount you’ve saved in the account to pay off your debts. If successful, you’ll pay a sizable fee to the debt settlement company, plus taxes on any debt that has been forgiven.
Does debt settlement work? Sometimes it does. Companies may be willing to settle your debt for 60% of what you owe, for example, because they believe getting something is better than nothing. But other creditors may be unwilling to settle the debt, and they may choose instead to turn over your accounts to a collection agency or to take you to court, adding legal bills to your financial troubles.
Does debt settlement affect your credit? Absolutely. When you work with a debt settlement company and stop paying your bills, your credit rating will take a serious hit. Even if you successfully settle your debt, you may not be able to apply for credit cards, loans, mortgages or rental apartments for years to come. That’s why, before you sign anything with a debt settlement company, it’s wise to explore all your options for getting out of debt.
Get free advice from ACCC about working with a debt settlement company.
American Consumer Credit Counseling (ACCC) is a nonprofit organization dedicated to helping individuals and families understand all their options for getting out of debt and living debt-free in the future. We offer free credit counseling services where you can talk with a certified professional about the pros and cons of bankruptcy versus debt settlement, the risks involved in hiring a debt settlement company, and other options available for eliminating debt that won’t ruin your credit.
At your free credit counseling session, we’ll help you get a clear picture of your finances by documenting your income, expenses, assets, and liabilities. Then we’ll walk you through all your options and help you choose the strategy that is most in line with your financial goals.
