If you have ever experienced trouble making timely payments on your various debts, you may have considered or at least heard about “settling” your loan obligations. In fact, everywhere these days it seems some company is advertising somewhere to help you lower your debt and pay it off in a fraction of the time.
Sounds great, right? Who wouldn’t take that offer?
However, before you agree to any settlement terms, you should be aware of some of the pros and cons of debt settlement programs.
Essentially, debt settlement occurs when you hire a third-party settlement company to negotiate with your creditors for lower payoff amounts and interest rates on personal loans, accounts that are in collections and other, open accounts like credit and charge cards. Though many of these settlement companies advertise that they provide a debt consolidation service, do not be fooled. Rather than offering you a loan to cover your debts on more advantageous terms, most debt settlement companies try to negotiate a settlement with all of your lenders or creditors.
How Do Debt Settlement Companies Operate?
Nothing in life is free, right? But, you’re already in financial trouble, how are you going to pay a settlement company?
The way these companies work is that they (attempt to) negotiate your debt down to a much lower amount and over a repayment period that works well for you. Once an agreement is reached, you will pay the settlement company every month that, in turn, will pay your creditors minus a deduction for the company’s fee or commission.
One of the first things any debt settlement agent will tell you is to cutoff communications with your creditors or lenders. Their mission is to make lenders so desperate for any type of payment from you that they are willing to negotiate for smaller amounts. After all, obtaining some money is better than no money!
Obviously, the most important advantage of settling your debt is that you will now have only one, more affordable monthly payment to make. In most cases, you will also only pay back a portion of the actual debt that you owe, without facing any (additional) penalties. This will clearly save you money in the long run.
However, there are cons to debt settlement. And, only those who already have a poor credit history should consider settling their debts. This is because settling can have a long-lasting negative impact on your credit standing.
Despite their negotiation of your debt, when your lenders agree to a settlement they will report your accounts as “settled for less than agreed” or “accepted settlement” to the credit bureaus. These negative remarks will lower your credit score and stay on your report for seven (7) years.
Furthermore, while you are ignoring your creditors in order to bring them to the negotiating table, they will still be reporting your missed payments to the credit bureaus. This means that your credit score will begin to plummet before you even know if reaching a settlement is possible.
An additional drawback of settling your debts is that these settlement companies often fail to clearly inform clients of how much money is actually being paid to creditors vs. the settlement companies themselves (for their services). There is always the potential that you could be scammed.
While there is no failsafe way to ensure you are not scammed by a debt settlement company, there are a few tips you can follow to help protect yourself. First, always ask questions and do research on the company in advance. The internet is a great place to start your inquiry. Second, try to avoid companies that contact you, rather than the other way around. Finally, read the fine print of any documents provided to you and make sure you understand it before signing anything.
Hire An Attorney
Luckily, debt settlement companies are not your only option when drowning in debt. If you or a loved one has come upon hard times making the payment of bills difficult or impossible, you need the help of an experienced debtor rights attorney—like those at Fitzgerald & Campbell—to review your case and discuss your options with you. Our attorneys have decades of experience representing clients in all types of debt defense matters, including settlement negotiations, and we are here to help you!