Debt Settlement

You want to get out of debt, but you're not sure which option is right for you.  Should you speak to a credit counselor, get a debt consolidation loan, utilize a debt settlement program, or just file bankruptcy?  Well, this page is dedicated to explaining what debt settlement is and how using this type of service could help get you out of debt when you know what to look for and what to avoid.

Bad Debt Settlement Services Explained

Debt Settlement services are also commonly referred to as bad debt consolidation service.  Don't confuse bad debt consolidation services with a bad debt consolidation loan.  A bad debt consolidation service will not lend you money.  They restructure your debt through negotiation with your creditors to decrease or eliminate your interest and late fees, and set up a payment plan.  They pay the creditors directly, and you pay them usually on a monthly basis.  Most, if not all, debt consolidation companies will expect your payment in the form of a cashiers' check or money order.  They don't want to lose money in the process, as they are in the business of making money as well. 

They typically pay the smallest creditor off first and continue paying off the negotiated balances with the remaining creditors.  As accounts are paid off, more and more cash is available to pay the higher balances off.  You get out of debt much quicker with their assistance due to the elimination of interest--most creditors would rather receive some money versus none.   However, be prepared to live without those credit cards as most creditors will require you to forfeit them in order to enter into the settlement.

This does not mean that you could not attempt a negotiation with your creditors yourself.  I would definitely recommend you giving it a shot before you pay someone else to do it.  You have nothing to lose but time.  Keep in mind that the debt settlement companies have established a working relationship with most creditors and may have better success than you for that reason.  The main focus here is to get you out of debt.

Your Key Benefits From Debt Settlement Services

• You only have to write one check per month for all your bills.
• You get monthly progress statements on your debt consolidation.
• Once you enroll your creditors can no longer call you.
• You can now pay down your debt balances where you could not before.
• Counselors can assist you and give you advice as part of the program.
• Credit card companies are willing to drop the interest rates to 0% to get their money back.

This type of service should be considered when you do not have any equity in your home or vehicle, or your credit is too bad to get an unsecured loan.  It usually works well with unsecured debt, such as credit cards, gas cards, department store cards, etc. 

Just as with a credit counseling service, the fact that you are working with a debt consolidation service may show up on your credit report--it depends upon the creditors as to how they want to report your information to the credit bureaus

Finally, make sure you understand the program that you are signing up for.  Know the consequences of default, and make sure all of your debt is included in the payoff plan, not just your unsecured debt.

Profit Or Not-for-Profit: Does It Matter?

Some of the "for profit" companies charge between 1 - 5% of your monthly payment as a service fee.  The "for profit" companies usually have up front fees of $300 or more before they'll even take you on as a client.  Sometimes the fee is refundable after 30 days if you decide not to enroll, sometimes you'll lose the fee, and sometimes it's refunded at the end of the program, usually 48 months.  If you quit the program before it's over (very foolish), all fees are non refundable. A typical profit company might charge you over $600 in annual fees that are added onto your monthly payment.  My suggestion, avoid "for profit" companies.

You should be able to find a not-for-profit organization who operates solely on donations.  (Avoid any company that pressures you into a donation before, after, or during providing you with any assistance).  The fees are typically paid by the creditors.  Some "for profit" companies will try to use that as a scare tactic --stating that because the fees are paid by the creditors, the not-for-profits are working for the creditors.  You achieve the same results, regardless of who paid the fees!

May I See Your License, Please!

Not all states require licensing for bad debt settlement agencies. The most notable examples are the states of Maryland and Florida. If the proposed company is based there, I would exercise extra caution (in other words, run!). In addition, some states have started licensing credit counselors. If you know your proposed counselor's name, another question to ask your state attorney general is whether or not he or she is licensed.

Before you do business with any company, check it out with your local consumer protection agency and the Better Business Bureau in the company's location

Conclusion:

Debt settlement allows you to pay your debt off quicker, and lowers the amount of interest you would have had to pay back, but make sure that you understand the terms and conditions of the services offered before you sign any contracts. 

Read the fine print and don't hesitate to ask questions if you don't understand something completely.  Watch out for any (including not-for-profit) company charging high upfront fees!

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