Credit & Debt Settlement Help

Lenders sometimes offer settlements when you fall behind, or you can try to negotiate with them if you know you cannot pay. Debt settlement companies offer paid negotiation help if you are uncomfortable dealing with with creditors yourself. Mike Schiano of the Military Money website warns that, while a good negotiator can reduce your debt significantly, your credit rating often takes a beating.

Definition

Credit and debt settlement means reaching agreements with your creditors to pay off your accounts at less than the original owed amounts. Schiano explains that debt settlement companies may help you get up to a 50 percent reduction on your balances. Lenders are under no obligation to accept any offers, or even to speak to a negotiator, but some agree because they worry that they might not get any money at all if you just stop paying or declare bankruptcy. The whole settlement process takes up to two years, according to MSN Money writer Liz Pulliam Weston.

Cost

Debt settlement companies charge fees to help you. Weston explains that many expect up to 18 percent of your debt's face value, while others assess their charge based on the settlement amounts. The Internal Revenue Service views the forgiven amounts as taxable income, which increases your tax bill.

Warning

Debt settlement may save you money and help you avoid bankruptcy, but Weston warns that it takes a toll on your credit score and opens you up to fraud. Lenders often will not negotiate unless your payments are behind, so settlement firms advise you to stop paying. Delinquencies are very bad for your credit score, since payments make up more than one-third of your number. Your creditors might decide to sue you rather than settle. Some settlement companies are run by scammers who demand money up front, then perform no negotiations.

Alternatives

Credit counseling is a service that assesses your financial situation and recommends various solutions, including structured repayment plans with negotiated terms. Counselors often get your interest reduced and convince creditors to "re-age" your payment history and waive late fees, which helps your credit reports as long as you make plan payments as agreed, according to the Federal Trade Commission. Chapter 13 bankruptcy frees you from much of your debt if you need a more affordable repayment schedule. The court allows you to keep most assets and sets up your payment plan. Bankruptcy is hard on your credit score and stays in credit bureau records for a decade.