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Should You Work With a Debt Settlement Company?

by Guest on November 16, 2012

If you’re facing overwhelming debt, turning to a debt settlement company may seem like an easy way out. Their ads often promise to settle your debt for less than you owe by negotiating with your creditors.[1] In reality, these companies often do their customers more harm than good. Understanding the basics of how debt settlement works can help you decide whether it’s a good solution for your situation.

How Debt Settlement Works

First, you call the debt settlement company to give them the names of your creditors and what you owe to each one. Then, you start paying the debt settlement company instead of your creditors. They put your money into a savings account, and start negotiating with your creditors after your account has reached a certain level. They will settle on an amount for you to repay and your account will be changed to “Charged-Off Settled” Or “Paid-Settled”.[2] Most debt settlement companies will either charge you a percentage of debt cancelled or a flat fee – be especially wary of companies that charge you up front for debt they haven’t taken care of yet.

So What’s the Issue with Debt Settlement Companies?

The whole process doesn’t sound so bad, so why all the wariness around debt settlement? Many companies don’t start the debt settlement negotiation until your bills are months past due. Furthermore, until they begin negotiating and have actually paid your creditors, you won’t be making payments on any of your debt. That means your payments will be considered late, the interest will continue to build, and your credit score will drop.[3] Remember that late payments stay on your credit report for up to seven years and may make it tougher for you to get new credit cards or lower insurance rates.

Government Investigation

In 2010, Congress began an investigation into debt settlement companies. With the help of government accountability office investigators, they found deceptive and potentially fraudulent practices running rampant throughout the industry.[1] In many situations, they discovered that debt settlement companies claim to help with credit counseling, but often drag their customers even further into debt. The fees these companies charge can be so high that debt settlement actually drives many customers away before their debts are cancelled.

Recommended Alternatives

Instead of turning to a debt settlement company, consider approaching your credit card companies directly. They may be able to offer you a hardship program that reduces your monthly payments and your interest rate. You may also want to try consumer credit counseling through your bank or government licensed credit counselors: It means that as long as you make your payments on time, your credit score should stay intact.[2] While these alternatives can keep you in your bank’s good graces, protect your credit, and provide an option other than bankruptcy, it’s still important to be aware that credit card debt settlement can mean that you’ll have to pay income taxes on the amount forgiven. Be sure to check with your bank and get all the facts before you begin any kind of debt settlement program.

Rachel Schramm writes articles for Check n Go about online commerce, responsible borrowing, investment, and budgeting. Visit their site to learn more about Check n Go payday loans and other services like installment loans.

References 1. Leamy, Elisabeth. “Fed Investigation of Debt Settlement Finds ‘Fraudulent, Abusive and Deceptive’ Practices.” 23 04 2010: n. page. Web. 16 Jul. 2012.. 2. Irby, LaToya. “The Dangers of Debt Settlement.” Credit/Debt Management. n.d. n. page. Web. 16 Jul. 2012.. 3. Todorova, Aleksandra. “5 Reasons to Avoid Debt-Settlement Firms.” SmartMoney. n.d. n. page. Web. 16 Jul. 2012..

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