The downside of making a debt settlement offer.
When you have more debt than you can handle, making a debt settlement offer to your creditors may seem like a great strategy. After all, who wouldn’t want to get out of debt by paying a fraction of what you owe? But there are serious drawbacks to every debt settlement offer, and it’s important to understand your exposure before you apply for debt settlement.
How does debt settlement work? When you work with a debt settlement company, you’ll stop paying your bills until the amount you owe has become significant. At that point, the settlement agency will approach your creditors to make a debt settlement offer, proposing to wipe out your debt with a lump sum payment that is less than what you owe. Creditors may be inclined to accept a debt settlement offer if they feel it’s the best they can do.
Does debt settlement work? Sometimes it does, but the risks can be high and costly. On top of hefty fees to the debt settlement company and taxes you must pay on any debt that is forgiven, you’ll also likely damage your credit rating so significantly that it will take years to restore it. And there’s a chance that your creditors may not accept your debt settlement offer, choosing instead to take you to court or to turn your account over to collections.
ACCC: professional advice to evaluate a debt settlement offer.
When considering a debt settlement offer, it’s helpful to get advice from a financial professional like the certified credit counselors at American Consumer Credit Counseling (ACCC). As a nonprofit agency dedicated to helping consumers find a path out of debt, we offer free credit counseling sessions where you can get help to evaluate your financial situation and consider all the options available to you. Our counselors can help you understand how to settle debt most effectively, and help you choose the strategy that makes the most sense financially.
Consider debt management instead of a debt settlement offer.
When you want to get out of debt as quickly as possible but don’t want to make a debt settlement offer or risk the adverse debt settlement credit impact, a debt management plan may be a better course of action. The benefits of a debt management plan vs debt settlement include:
- No lasting damage to your credit rating, since you’ll continue to pay your creditors.
- Assistance from ACCC to pay your bills on time – you will make one monthly payment to ACCC and we’ll be responsible for making sure your bills are paid on time each month.
- Developing the habits that will help you to not only get out of debt, but to learn to live debt-free in the future.
Most consumers who enter a debt management plan can pay off their debts within 60 months.