Sound familiar? Many debt relief companies try to convince you to use their services with these promises. What they don't tell you is how they could hurt you.
What You Need to Know
Debt Settlement is the settling of debts for less than the original balance. With a debt settlement company, instead of making payments to all your creditors every month, you will make one monthly payment to the company, which will be less than what you used to be paying. Once you have paid the settlement company a sum of money, they will start to negotiate with your creditors to settle your debts for less than what you owe. Often creditors will be willing to accept 50-75% of the balance due, if you have the money up front.
Dangers of Debt Settlement
It can hurt your credit. While you are saving up enough money to make a settlement offer, your accounts could be left for up to 6 months without a payment! Remember, payment history is 35% of your credit score. Additionally, collectors may continue calling you, charging interest, charging fees, and filing lawsuits to collect the debt. When you do settle, it will appear on your credit report as "Settled for Less Than Amount Due," which will negatively affect your future credit.
Creditors may be unwilling to work with settlement companies. Because of predatory practices by some settlement companies and the high fees associated with them, your creditor may not negotiate with your settlement company. You would be better off saving the money and talking to the creditor yourself.
They take their share first. Along with monthly fees, debt settlement companies ensure that THEY get paid by pocketing their costs first, before putting YOUR money toward YOUR debts.
You are responsible for taxes on the amount written off. If you settle for less than the amount owed, the amount forgiven may be considered taxable income by the IRS.
Alternative to Debt Settlement
Debt Management allows you to pay back what you owe, in full, over an extended period of time. Monthly payments are reduced, and can be adjusted for economic hardship. With a debt management plan, you will pay off your balance in full, resulting in an improved credit score. You agree not to take on any more debt, and your fees and interest may be lowered.
You can contact your creditors on your own. If you are ready to get back on track with an overdue bill, you can contact your creditor directly. Ask your creditor if they have a "hardship" program for customers having financial difficulty. You may be able to get a temporary reduction in your monthly payment and interest rate. Good luck!