Companies That Settle Debt

The promise of a quick solution to an overwhelming debt problem is tempting to those who struggle to pay down steadily growing balances. Companies that settle debt claim that, for a fee, they can reduce the amount you owe your creditors---ending the stress of collection calls and legal threats. Before going the debt settlement route, its important to understand exactly what you're up against, since not every debt settlement company can back up its claims.

How It Works

Debt settlement companies offer to lower the balances you owe by working with your creditors. Typically, you must make payments to the company that will hold your payments in an account until reaching a settlement agreement with your creditor. It then pays the settlement using the reserved funds.

Unfortunately, few individuals who need to settle their debts have the extra cash with which to do so. Thus, debt settlement companies often instruct consumers to stop making payments to their creditors and redirect that money to the debt relief organization's settlement fund.

Fees

The Federal Trade Commission's Telemarketing Sales Rule strictly prohibits debt settlement companies from charging you any fees upfront. The company can only charge for its services after successfully settling your debt. Fees vary widely in the settlement industry, thus consumers should ask for a written fee schedule before signing up with the company to avoid unpleasant surprises later on.

Legal Dangers

While creditors can take advantage of the settlement company's offer and agree to lower your balances rather than not receive payment, your creditors are free to reject a potential settlement and instead pursue you for the full balance in court. A creditor that wins a lawsuit against you is free to seize payment in full through wage garnishment, bank levies and, in some states, personal property seizure. Regardless of what the debt settlement company's advertisements claim, not all creditors are willing to participate in the program.

Credit Concerns

Withholding payments from your creditors in order to compile a settlement fund with a debt relief agency leaves your credit history littered with late payment notations. Because your payment history makes up 35 percent of your total credit rating, a series of late payments can have a disastrous impact on your credit scores.

In addition, settling a debt rather than paying it off also dings your credit score. Future lenders will see that you cannot be trusted to responsibly pay off the full amount you borrow and will be more hesitant to lend to you. Most derogatory credit information, such as late payments and debt settlements, remains on file for seven years. Thus, while a debt settlement company can potentially lower your outstanding balances, your credit will bear the scars of the agreement for years to come.