Is Debt Settlement a Good Way to Get Out of Debt?

If your debts become overwhelming, debt settlement programs may seem an attractive alternative to habitually making late payments. However, the negative impact of debt settlement on your credit record can be significant. The potential for lawsuits also exists as does the possibility that a debt settlement program will fail to renegotiate your debt with creditors. Although debt settlement may be an alternative to bankruptcy, it may not be your best option.

Identification

Debt settlement programs offer to negotiate with your creditors to reduce the amount of money you owe. Program representatives may advise you to stop making payments to your creditors during the negotiations. The typical program requires you to send payments directly to the debt settlement company, which holds your money in an account until a settlement is reached. At that time, the negotiated balance is forwarded to the creditor. Debt settlement firms also collect fees for services once a settlement with creditors is reached.

Risks

If you agree to a debt settlement program, your financial situation may get worse rather than better. If you stop paying your creditors, interest continues to accrue and your accounts may be subject to late fees and over-the-limit fees. This results in higher credit balances, sometimes doubling or tripling the amount you owe, cautions the Federal Trade Commission. Creditors may also refuse to negotiate accounts and sue you for the balance. Failure to make timely payments results in negative entries on your credit report, and Consumer Reports notes that negotiating a partial payment with creditors hurts your credit as well.

Warning Signs

Debt settlement companies have taken hits from the Federal Trade Commission for unfair business practices, including charging customers prior to negotiating with creditors and misrepresenting their services. The FTC warns consumers to steer clear of debt settlement firms that charge up-front fees, instruct you to cut off communications with your creditors, promise to stop collection calls, tell you that debt can be settled for a fraction of the balance or allude to government programs that rescue you from credit card debt. If you consider working with a debt settlement company, check out the company history with the Better Business Bureau and your state attorney general's office.

Alternatives

You have other options when it comes to debt management. Nonprofit credit counseling organizations provide budgeting help and offer debt management plans to help you pay off your creditors without debt settlement. These agencies often negotiate with creditors for fee waivers and lower interest rates. You send a monthly payment to the credit counseling agency, which then makes payments to your creditors. The U.S. Trustee Program maintains a list of approved credit counseling companies by state.