The world of debt settlement options can be confusing. Debt settlement companies may claim to be able to settle your debt for pennies on the dollar, but neglect to explain the ramifications. Before agreeing to a debt settlement, look carefully at your debt, your credit score and your other options first.
Consider the Effects
While it's true that settling your debt can allow you to reduce the debt you owe by thousands, it does so at the cost of your credit score. Most creditors will not agree to debt settlement until you have missed several payments. By that time, your credit score has plummeted. Missing payments is one of the most destructive things you can do to your credit score; when creditors turn your accounts over to collection agencies, that too is detrimental to your credit score.
Debt Settlement Companies
You may be considering debt settlement after being contacted by or contacting a debt settlement agency. Even if you are willing to take the credit score consequences of debt settlement, think twice before allowing a debt settlement company to negotiate a settlement for you. Most companies require money up front -- money that could be going toward your debt -- and charge stiff fees for their services. Some are fly-by-night operations that may take your money and run.
Creditor Settlement Options
Sometimes, creditors may offer you a settlement on your debt. If you are contacted by someone claiming to be your creditor, first contact your creditor to make sure the offer is legitimate. Before agreeing to the settlement, make sure you have the money available, and get something in writing from your creditor. If possible, ask your creditor to report the debt as "satisfied" -- if the creditor notes "settled for less than amount owed" in your credit report, your credit can be adversely affected.
Seek Credit Counseling
Before you agree to a settlement offered by a debt settlement company or a creditor, consider credit counseling. If settlement seems to be the only way to pay your debts, a consultation with a reputable credit counselor can help you to discover all your options, not just debt settlement. One option may be a debt management plan. If you qualify for a debt management plan, the credit counselor will negotiate with your creditors for lower monthly payments and interest rates so that you can repay your debts.
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