If you have a lot of credit card debt, settling that debt can seem like an appealing option. However, there's a dark side to debt settlement that the commercials and websites don't tell you about. Debt settlement not only might not be able to produce the desired effects for you, but it can also destroy your credit in the process.
Debt Settlement Basics
The recession in the United States has given rise to an entire industry of debt settlement companies who claim that they can get you out of debt. The goal of debt settlement is to eliminate your debt for less than you owe. While anyone can try for a settlement with their credit card companies, these debt settlement groups have enough experience to know how to push the buttons of your creditors.
Tarnished Payment History
If you choose to do business with a debt settlement company, the first thing it will tell you to do is to stop making payments on your credit cards. The money you'd be using for your minimum payments instead goes to a pool of cash to be used for an eventual settlement. Missing your payments gives the credit card company a reason to settle with you -- getting some money is better than getting nothing at all -- but it comes at a cost. Your payment history is the most important part of your credit score, so going this route will significantly reduce your score.
Paid Not in Full
When you pay the amount the credit card company agrees to take, your account is closed and you can move on. However, the account will be closed with a note stating that your balance was paid below the original terms. This is a damaging item on your credit report that will haunt you for the next seven years. Future credit applications may be denied because creditors will see this note and assume that since you didn't pay in full in the past, you are a risk for getting into trouble again.
No Guarantees
The worst thing about debt settlements is that there are no guarantees throughout the entire process, aside from the ruining of your credit rating. A credit card company has no obligation to settle with you, despite what any debt settlement company might tell you. Furthermore, it has the right to sue over past-due balances and can garnish your wages if it wins that suit. Even if you end up coming out with a nice settlement, the situation isn't ideal; not only is your credit history in tatters, but you must pay taxes on anything included in the settlement.
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