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Recently a reader in the Private Facebook Group asked, “Does anyone have experience with debt settlement companies? Is it true your money goes into escrow acct you don’t pay your creditors until they settle with them in 180 days? My credit would suffer for months and I am up to date with all of them. Not sure this is the way to go. Please help!”
I was so glad she asked this question because help from the group saved her from making what could have been a terrible mistake that would have cost her dearly.
In the case above, debt settlement would have been a terrible idea for her due to the fact she was current on all her payments and was able to make the minimum she owed.
Her credit was still intact. Debt settlement would have destroyed her credit and creditors would not have been willing to take less than they were owed because they could see she clearly was able to make payments. Her payment history was stellar.Debt settlement only comes into play when you’re hopelessly behind on your payments, haven’t been able to make payments at all, your credit score is already trashed and you don’t have the income to keep up.
As you explore your options for debt settlement, beware: It’s risky, doesn’t work for many people, and may just prolong your financial pain. It won’t stop late fees, collection notices or even threats of being sued while the process plays out.
If you can erase your debts via Chapter 7 bankruptcy, that might be a better option that debt settlement. Talk with a qualified attorney who can help you sort out all your debt settlement/repayment/bankruptcy options.
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WHAT YOU NEED TO KNOW ABOUT DEBT SETTLEMENT
Debt Settlement companies don’t want you to fully understand their process, but I’m here to divulge their secrets and help you understand what you NEED to know about debt settlement programs.
First, debt settlement companies tell you to stop making payments on your bills. Instead, you make a monthly payment directly to the debt settlement company.
At first, you might be thinking this sounds a lot like debt consolidation, but you’d be wrong. There is a huge difference between debt settlement and debt consolidation.
In debt consolidation, you combine all your bills and get a loan to pay off all your debt. You’re left with one payment, hopefully with a lower interest rate. Your debt is wiped clean to the creditor’s delight.
You continue to make one single payment each month to your new debtor (the consolidation company) until that debt is paid in full.
In debt settlement, the company instructs you to stop making payments to your creditors. Your accounts become delinquent, and the debt settlement company tries to negotiate a settlement on your behalf.
In the meantime, you’re giving your money to the debt settlement company, who is not paying the creditors with it. The settlement company is stockpiling your money (and taking a nice fee for doing so) so it has something to eventually offer your creditors.
So while this is happening you must understand you’ll be getting lots and lots of calls from angry credit card companies aggressively trying to collect on your overdue bills. This will last for 180 days until they write off your debt and sell it to a collection agency at a fraction of its face value.
The debt settlement company comes back into the picture at this point. They assume the collection agency will agree to a settlement with you. The debt settlement company handles this with the money they’ve been collecting from you.
If when the time comes there isn’t enough money in your account, you continue to pay the settlement company until the debt is paid off.
Here’s the downside: there is NO guarantee your creditors will agree to a discounted payoff. You’ll continue to incur late fees not to mention the really bad damage you’ve done to your credit.
Here’s some article to help you get your financial house in order:
How To Budget When You’re Living Paycheck To Paycheck
6 Simple Habits That Will Transform Your Finances
How To Manage Your Bills So You’re Never Late Again
WHAT DEBT SETTLEMENT COMPANIES FORGET TO TELL YOU
In 2010, after numerous complaints from consumers across the country, the Federal Trade Commission decided to crack down and issued The Final Rule for Debt Relief Companies.
In a nutshell, it ruled that debt settlement companies that sell their services over the phone (because most of them do it this way) can’t charge a fee before they settle or reduce a customer’s unsecured debt. Before too long, customers were complaining that debt settlement companies had switched their tactics to texting them in attempts to skirt the phone-call restrictions.
Another big issue debt settlement companies don’t disclose is the IRS ramifications.
When you have your debt reduced the forgiven debt is considered income. So by way of example, if you’re in the 30% tax bracket, and your $30,000 debt is reduced to $15,600 your tax bill would be $4,680.
Then there is the effect debt settlement has on your credit score.
Just because you’re working with a debt settlement company your credit report is still taking monthly blows to your credit score each time lenders report late or missed payments.
On average, debt settlement typically cuts off between 60-100 points from your credit score although I know of many people who suffered much more significant blows to their credit scores from working with debt settlement.
This results in higher interest rates on loans assuming you can get a loan at all.
DIY DEBT SETTLEMENT
If after weighing all the pros and cons you still feel debt settlement is still something worth pursuing, you can always go the do-it-yourself option.
You can negotiate directly with credit card companies and other lenders, and see if they would be willing to reduce your debt.
If bargaining over the phone doesn’t sound appealing (you’ve got to have thick skin and a stomach for the harassment you’ll get), you can always send creditors a letter explaining your situation and offer partial payment.
Be sure to ask that they remove delinquent payments from your credit report.
Doing it yourself could save you thousands of dollars, though when it comes to debt settlement remember there are no guarantees.
You might also consider DIY debt settlement if you are being sued over credit card debt.
There may not be time to work with a debt settlement company. Your creditors may prefer to work out a settlement with you then pay the legal expenses associated with going to court.
However, you must be prepared, with a good chunk of change, to pay a lump sizable lump sum to achieve the settlement.
CREDIT COUNSELING
Credit counseling may be a great alternative to using debt settlement, bankruptcy or ignoring it all together. They can help you find a debt solution that fits your personal financial situation.
These non-profit consumer agencies offer free counseling sessions, which include a budget evaluation, online, via phone or face-to-face. They assess your total financial picture to make recommendations and guide you towards a customized solution to meet your needs and pay off your debt.
Depending on your situation, they may be able to enroll you in a debt management program with lower interest rates and fees, to help you pay off your debt faster than you may be able to on your own. You can still make one payment a month without borrowing more money.
CONCLUSION
Debt settlement may sound like a great idea but it comes with a whole host of issues, fees, and problems that could seriously make matters worse for you. Before making any decision, get the facts and understand all your options and choices.
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I’m a professional cleaner with over 13 years of hands-on experience cleaning homes, a published writer, certified money specialist, and the founder of A Mess Free Life. After paying off over $50,000 in debt, I dedicated myself to helping others master their homes and their money — proving that a clean, organized, stress-free life is possible no matter where you’re starting from. When I’m not writing, you’ll find me cooking, playing bocce, sipping an extra dirty martini, or enjoying the ocean with my cats nearby. I’m also a proud mom and grandma who cares deeply for my mother at home.
