Debt Settlement -- What to expect and what to avoid

Much like Credit Counseling, Debt Settlement agencies work with you and your creditors to help you become debt free. However, unlike Credit Counseling or Debt Reduction agencies, who work with your creditors to get you a lower interest rate, Debt Settlement agencies work with your creditors to reduce your debt balance, sometimes by as much as 50-75%! Sounds pretty easy? There are some drawbacks and things to avoid…

People who are extremely in debt and are without the means to repay should be the only ones to use debt settlement and should not be used by persons who are looking to get something for nothing.

When you go through a debt settlement agency, typically there are some startup fees involved. This fee should not be higher than what you have agreed to pay every month. Also, the agency will probably charge a monthly maintenance fee.

After you agree to join their program, the settlement agency will start collecting money from you on a monthly basis and putting this money into an escrow account where it can build until you have enough money to begin settling one or more of your accounts. After an ‘accumulate’ amount is reached, the agency will then contact your creditors and begin negotiating a reduced payoff of your account. This money is then sent to that creditor and you begin accumulating money into your escrow account again. Most settlement agencies also usually charge a settlement fee as well, often a percentage of the amount that they have saved you.

Keep in mind that while you are accumulating money in order to pay off these debts you are still accumulating late fees and interest charges, which is increasing your balance. If your agencies charge you a settlement fee, be sure that the percentage of savings they apply their fee to is on the original balance, not the current balance!

Because you are not paying your debts your creditors are going to report your accounts as delinquent and your credit report is going to be very negative for several years. It is up to you to weigh the benefits of getting out of debt using this debt settlement method versus filing bankruptcy or handling the matters yourself.

Proper budget planning can help you avoid this situation altogether.



Be sure to read our related articles on Debt Consolidation, Credit Counseling, and Bankruptcy!