If you’re looking for ways to get out of debt, you may be considering working with a debt settlement company. While debt settlement can help, it’s not without risks. Understanding the pros and cons can help you decide whether it’s the right option for you.
What is Debt Settlement?
Debt settlement companies negotiate directly with creditors to reduce what you owe, usually on unsecured debt such as credit cards. When a settlement is reached, the account is closed and collection calls and letters generally stop. While this may sound like a win, be cautious of what this means for you.
Pros of Debt Settlement
- Owing less: You will potentially owe less than the original balance, saving you thousands.
- End creditor calls: Once you start working with a debt settlement company, you should get relief from creditor harassment.
- Avoid bankruptcy: Debt settlement may offer an alternative to filing for bankruptcy by allowing you to resolve outstanding debts for less than the full balance owed.
- Pay down debt faster: Debt settlement can allow you to reduce what you owe, potentially paying off your balance more quickly than making only minimum monthly payments.
- Allow a professional to help: When you get a professional involved, it can reduce the stress of having to deal with it all on your own, plus they know the ins and outs of the process.
Cons of Debt Settlement
- Credit score hits: Debt settlement companies typically advise you to stop paying on your credit cards completely, making it more likely your lenders will enter negotiations. However, during this time, penalties and interest still accrue, hurting your credit score.
- High fees: Debt settlement companies typically charge high fees, often 15%-20% of the settled debt.
- No guarantee: Lenders aren’t obligated to work with debt settlement companies. They may instead send your account to collections or take legal action to recover the full balance, which could lead to wage garnishment.
- Credit history impact: Debt settlement stays on your credit report for up to seven years.
- You may owe more: Due to the high fees, penalties from stopping payment, and potential for no negotiations, you may end up in more debt than you began in.
Debt Management Plan
While debt settlement may offer potential benefits, there are safer and more effective alternatives. Working with a nonprofit, certified credit counseling agency to can help you regain control of your finances. A counselor can assist with budgeting, financial literacy, and, if needed, set up a debt management plan. This plan allows you to repay your loans over three to five years, with the counselor negotiating reduced interest rates and consolidating your payments into a single, affordable monthly amount.
By streamlining the process and making it more affordable, you can pay back your loans without damaging your credit score or racking up even more debt in the long run.