The commercials, usually played on AM radio or late-night TV, promise an easy solution to your debt woes: Debt settlement companies say they can eliminate your debts in as little as two months or reduce the amount you owe by 65 percent, 75 percent, or 85 percent.
That sounds pretty great. But debt settlement isn’t quite as simple as those commercials promise.
Working with debt settlement companies — firms that negotiate lower debt amounts with your creditors — comes with serious financial repercussions. And plenty can go wrong. Before you sign up for debt settlement, make sure you explore your other options.
A dangerous gamble
The biggest problem with debt settlement is that it’s a gamble. You’re gambling that the process will work and that your debts will either be eliminated or lowered. Unfortunately, there are no guarantees that this will actually happen.
And because of how debt settlement companies operate, you can cause severe damage to your credit while taking this bet. Say you are struggling to afford your monthly credit card payments and a host of large medical bills. You call a company specializing in debt settlement. That company will then tell you to stop making your payments to this creditor.
That sounds like terrible advice (because it is). The debt settlement company’s goal here is to convince your creditors that there is no way you can afford to pay off your debt in full. But it often takes months for the settlement company to convince your creditors to lower your debt.
Defaulting for that long ruins your credit.At the same time, the debt settlement company will ask you to make regular payments to it, which the company will deposit in a savings account. During the time that you’re not making payments to your creditors but you are making them to the debt settlement service, the company will negotiate with your creditors, hoping to reduce the amount you owe to each of them.
Once your creditors and your debt settlement company reach an agreement, the company will use the funds you’ve deposited to pay off the remainder of your debt, taking a cut as its own fee.
It doesn’t always work
Unfortunately, debt settlement doesn’t always work. A report by the Association of Debt Settlement Companies made to the Federal Trade Commission in 2007 reported that on average, only 45 percent to 50 percent of consumers complete a debt settlement program once they’ve started it. Many customers take actions that will hurt their credit scores only to gain no financial relief by doing so.
In 2010, the U.S. Government Accountability Office reported even lower rates, saying that less than 10 percent of consumers successfully complete a debt settlement program.
You could be charged high monthly fees
The National Foundation for Credit Counseling says that many debt settlement…
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