Consumer debt settlement occurs when debtors who are at least three to six months behind on their credit card payments pay credit card companies a lump sum of money in exchange for an 25% to 80% decrease in their outstanding debts. Sound like a dream? Not exactly. Debt negotiation programs carry a wide array of risks that debt settlement companies rarely inform you of.
This solution is one of the riskiest ways to decrease your debt, and is usually only used by those who are way behind on their debt and do not have the income to ever pay the amount owed. Credit card companies allow some customers to settle their debts because they fear they will soon go into bankruptcy, and would rather collect some of the debt now rather than none later. The problem for debtors is that in order to qualify, you must stop sending payments to the credit card company for three to six months, during which time you will most likely receive many disruptive calls from credit collectors.
As of summer 2010, consumer debt settlement companies can no longer charge upfront fees before settling or reducing your debt, so you don’t need to worry about that. What you do need to worry about is if they are handling your money correctly. Look out for those that tell you to stop all communication with your creditors promising they will act as a liaison. They might tell you to send all your payments to them, and they’ll get it to the credit card company. However, they may not get your payments in on time or they may take a very large cut of the money you send in. Be sure to check with the Better Business Bureau and find out if any complaints have been filed against the company.
Debt settlement can also have a very negative impact on your credit score. A creditor can place a “settled for less than owed” on your credit score, which will deter future lenders. Sometimes, creditors will agree to leave this statement off of your report as a part of the settlement agreement; however, if they don’t it can permanently damage your credit report.
You will also have to pay income taxes on the money you saved in the debt settlement. So, while you’re saving in the front end, there are repercussions later.
Debt settlement is a legal, viable option for those who do not see any other way to pay off the amount of debt they owe without going into bankruptcy. However, there are advantages and disadvantages to this method that take very careful consideration.
Jena is the Vice President of Marketing for the Undergraduate Consulting Club and a Kenan-Flagler Center for Sustainable Enterprise Fellow. As a CSE Fellow, Jena works to integrate sustainable principles throughout the business school through speakers, consulting engagements and the publication of the Sustainable Enterprise Quarterly, as well as several other initiatives. Jena also mentors high school students in Durham through Strive for College, an on-campus student organization which guides low-income students through the college application process.
Jena is from Keller, Texas and enjoys baking, working out, and reading books related to self-improvement and sustainable enterprise.