The pros and cons of working with debt settlement companies.
Debt settlement companies offer to help you get out of debt quickly and for only a fraction of what you owe your creditors. But how do settlement companies manage to do this? Does a debt settlement program work for most consumers? How bad is debt settlement for your credit, and how do you go about choosing the best debt settlement arrangement?
Here's a short overview of how settlement companies operate, which can help you determine if working with a settlement company is the right choice for your financial situation.
What do settlement companies do?
Debt settlement companies offer to help you settle debts by first stopping all payments to your creditors. Rather than paying your bills each month, you'll save that money in an account managed by the settlement company. Once your accounts are seriously overdue, the settlement agency will approach your creditors and propose to settle your debt for some percentage of what you owe. Some companies are inclined to say yes – they may feel that getting some money from you is better than nothing – and you'll make your payment from the money you saved. At that point, the settlement companies take their fee – usually 25% – and you'll have to pay taxes on the amount of debt forgiven by your creditors.
However, creditors are not required to settle your debt and they may instead choose to sue you to get their money or send a collections agency after you. Ultimately, with interest, penalties, and legal fees, you may end up owing more money than when you started.
Whether your debt is settled or not, your credit rating will take a hit. It may take up to seven years before you can apply for credit cards, rent an apartment, get a car loan, or take out a mortgage.
So, is debt settlement a good idea? That's a great question to ask the financial professionals at American Consumer Credit Counseling (ACCC) before signing an agreement with any settlement companies.
Get objective advice on settlement companies from ACCC.
As a nonprofit organization, ACCC offers free credit counseling that can help you understand your financial position and explore all the options on the table for getting out of debt. At your free credit counseling session, our professionally certified counselors can walk you through the pros and cons of bankruptcy and debt consolidation vs debt settlement and introduce you to other alternatives like debt management that can help you preserve your credit rating as you work to pay off debt within five years.
When you're ready to take your first step toward a debt-free future, contact us for a free credit counseling session in person or by phone to learn more about settlement companies, as well as other ways of paying down your debt.