Whats Wrong with Debt Settlement?

When you’ve got $10,000 or more in credit card debt and ready to do something about it, debt settlement may seem like a good idea. You may have seen or heard a commercial promising to cut your debt in half. It would be great! In reality, getting involved with a debt settlement company isn’t the best choice and can actually make your problems worse. 

Debt Settlement Basics
After you explain your debt situation to the debt settlement company, you’ll be required to provide them with creditors, account numbers, and the amount of debt you owe to each. They may give you an estimate for how long it will take to settle as well as an amount you will pay each month to them in order to accumulate the money for the settlement offer. Typically, as part of the program, you’ll be advised to stop paying your creditors. The first several or more payments you make are the fees you pay to the debt settlement company—they don’t go towards the bills at all. The rest of the payments are put into an account to accumulate for the debt settlement. Once the account has grown to the appropriate amount, the debt settlement company will then start negotiating with your creditors. It’s important to keep in mind that there is no guarantee the creditors will even agree to settle. 

What is the Problem?
You may be thinking, “I had $10,000 of debt, now I only have $5,000—sounds good to me.” Any company claiming to help by advising their clients to stop paying their creditors and pay them instead is leading you down the wrong path. Of course, they take their fees first while you still get socked with late charges and higher interest rates.
In addition, they collect their fees first (by charging your credit card, of course) and don’t even do any actual work for you. Think about how long it would take to stockpile enough cash to make an offer to settle. Depending on the amount of debt, it could take years. If you can accumulate that much money, you probably wouldn’t be in a financial crisis. Meanwhile, the damage it causes can be devastating. Your ability to get an auto loan, a mortgage, reasonable insurance rates, lease an apartment, and even get a job will be severely compromised. 

Honest, reputable debt help is only good when it doesn’t cause further damage to your life or credit. It is never a viable option for those who want to maintain their credit rating or improve their credit rating. Not making monthly payments directly to your creditors can cause major legal problems. 

The Cost of Debt Settlement
Besides the initial set up fee and monthly fees, there are other drawbacks that debt settlement companies typically fail to disclose:

• Increased collection calls
• Damages credit history
• Possibility of lawsuits
• Tax consequences
• Multiple creditor problems

Although debt settlement is legal, you will probably still end up in a financial mess. The Federal Trade Commission has had to close down many debt settlement companies and has kept a careful eye on the industry ever since. Knowing the facts can help protect you from becoming a victim. More likely than not, many consumers seeking debt settlement don’t really need it. Experts advise tackling your debt in a more legitimate and systematic way. 

Credit Counseling Works
Credit counseling will not only supply you with sound advice and a personalized plan, but they’ll negotiate with creditors right away to lower your interest rates and monthly payments. This is not settlement, but by lowering high interest rates and getting fees waived, you will then be able to get a handle on your debt and pay it off. The most important issue is to successfully pay down your debt and gain control of your finances to secure your future. A reputable, ethical credit counseling organization will enable you to become debt free while keeping your integrity and piece of mind.