Does Debt Settlement Work? | CCCS of Rochester
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Does Debt Settlement Work?

Debt settlement may seem like the perfect option if, like so many other people in this country, you’re suffering from a pile of debt. But while the promise of paying off loans for less than you owe may seem like a good idea, the adage stands true here: If it seems like it’s too good to be true, it probably is. That’s not to say that debt settlement doesn’t work for some people, but for most, it can be more trouble than it’s worth.

What is Debt Settlement?

A debt settlement company negotiates with your credit lenders to reduce the amount you pay in full, primarily on unsecured loans like credit cards. Once a deal is negotiated, creditors can no longer harass you and you’ll have paid off your debt. Sounds good, right?

Debt Settlement is Risky—and Pricy

The reality is debt settlement can actually put you in a worse position than you started in. To begin with, debt settlement forces you to stop paying on your credit payments. This is done so that lenders believe you are unable to pay back the amount in full and makes it more likely they’ll enter negotiations. In the meantime, the money usually reserved for your credit cards will go to the settlement company in an account until enough has accrued to pay the lenders.  

While you’re not paying your bills, penalties and interest accrue, and your credit score will take hit after hit. Negative marks like missed payments weigh heavily on your credit score and will stay on your credit history for seven years. After a period of missed payments, there’s no guarantee lenders will event agree to settlement—some creditors won’t negotiate with debt settlement companies at all—and they may choose to turn you over to a collections agency or even sue.

When a lender does agree to a reduced sum and loan forgiveness, the debt settlement company will take up to 25% of the money saved. It’s also important to note that the IRS may consider your forgiven debt taxable income, slapping you with a tax obligation you weren’t prepared for.

Given all the downsides of debt settlement, most experts agree that this method of paying off debt should be a last resort, falling just above bankruptcy in its long-lasting impact on your credit score. Fortunately, there are other options to pursue that won’t potentially land you in more debt.

Debt Management Programs

Before getting on board with debt settlement, talk to a credit counselor. A counselor can help you manage your debt better, as well as get you on a plan to pay it off in a relatively short period of time. When you enroll in a debt management program, a counselor will work with your creditors to consolidate your unsecured debt into one affordable monthly payment while also lowering your interest rates. Debt management plans are designed so that you can pay off your debt in three to five years, all while working to raise your credit score and emerge debt free.

Think carefully before going heading towards debt settlement. Alternatively, a debt management program can help get you out of debt without all the downsides of settlement, allowing you to recover your financial health more quickly and efficiently.