Do Debt Settlement Companies Help or Harm?

Debt settlement companies may make big promises, but in reality, they can cost you lots of money in high fees, and the settlement could severely damage your credit. It's vital to research debt settlement companies before obligating yourself to any agreements. Carefully weighing other options with a credit counselor may help you to determine the best course of action.

Debt Settlement

When settling debts, you pay a portion of the total amount owed in one lump-sum payment, and the creditor forgives the rest of the balance. Generally, the lump-sum payment is 20 to 75 percent of the total balance. Creditors only agree to settlements if they believe that you're headed for bankruptcy. Creditors view consumers as potential bankruptcy candidates after they default on payments for several months.

Debt Settlement Companies

Debt settlement companies act as the mediator between the consumer and the creditor. They often advertise themselves as an alternative option favorable to bankruptcy, and suggest that they will get you the lowest lump-sum payment possible. However, according to the Federal Trade Commission, debt settlement companies cannot make any guarantees on their services.

Warnings

Debt settlement companies may charge very high fees, and they may not be able to follow through on their promises. In addition, it's important to check with the Better Business Bureau before working with a debt settlement company, since they act as the intermediary in handling your money before it reaches the creditor. It's also vital to understand the damage you're doing to your credit score by defaulting on payments to get your creditors to agree to settlement. According to finance writer Liz Pulliam Weston, just one payment made over 30 days late may decrease your score by as much as 110 points.

Considerations

Those who do want to go with debt settlement may be able to do so without working with a debt settlement company. After defaulting on payments for three to six months, call your creditors and explain what you have to offer them in the form of payment. If they refuse to accept, let them know that you're willing to work with companies who will settle, but the rest of your accounts will go to bankruptcy. Before deciding on settlement, however, work with a credit counseling agency approved by the National Foundation for Credit Counseling, to understand your other options, such as debt consolidation, debt management plans and bankruptcy. These three forms of debt relief may be less damaging than settlement.