When your debt is overwhelming, settling for less than you owe can seem like a great solution. TV and radio advertisements make it seem easy, but the truth is that debt settlement isn't for everyone. Though you can reduce the amount that you have to pay the company, you'll have to pay with a lower credit score, which can hurt you in the long term.
Creditors vs. Collections
Initially, you owe debt to a creditor, typically a credit card company or a bank. When you don't pay that money back, it goes to a collection agency. It's easier to get a debt settlement through a collection agency. The original creditor, however, may be willing to work with you by decreasing your interest rate, which can significantly decrease the amount of money that you owe the company.
When It Can Work
A company won't bargain down the amount that you owe until it starts to worry that you won't pay anything at all. Typically, this means that you need to skip making payments for several months before the company will bargain. At that point, you may be able to settle your debt for between 20 percent and 75 percent of the amount of your debt.
How to Bargain
One way to bargain down your credit debt is to hire a debt settlement company to handle the negotiations for you. This comes with additional fees, however, even if you back out. You can also wait for the company to approach you with a settlement offer. This can happen after you've stopped making payments for several months. This is an easy approach. If you want to be more proactive, you can contact the company and make an offer to settle. You should have the full amount that you want to pay on hand to make the payment immediately.
Effects of Debt Settlement
Settling your debt in this manner can have an adverse effect on your credit score. The credit bureaus partially base your credit score on your credit history and by stopping payment on a debt, you will decrease your score. Additionally, some companies will report that you settled the debt, rather than paying the full amount, on your credit report. This may not look good to lenders in the future.
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