Debt settlement services work with people who have a considerable amount of unsecured debt and either do not have the means to pay at their current rates or are likely to have problems paying in the future. Unlike credit counselors or debt management programs, settlement companies attempt to settle your debt, promising you savings. This may cost more than you had planned, however.
Debt Consolidation
When you enlist a debt settlement company to help solve your debt problems, you will consolidate your debt into a single account for a lower monthly payment than you currently are paying in combined bill payments. That action can save you several hundred dollars per month, which can alleviate your short-term financial woes. According to a National Consumer Law Center (NCLC) report, a minimum debt amount usually is required to hire a debt settlement company, and the minimum typically is between $5,000 and $10,000. However, agencies such as the NCLC and the Better Business Bureau note concern regarding the course of action taken by some debt settlement companies on your behalf.
Debt Advice
According to the NCLC report, debt settlement companies often require consumers to place money into an account, building the account balance with monthly payments until enough equity is deposited to make a cash settlement to the debtors. However, in the meantime, according to NCLC, the debt settlement company often urges consumers to stop paying their debts, opening them up to law suits and damaging their credit for the short term. Late fees and debt continue to rise as the debts remain unpaid, and creditors may turn those debts over to collection agencies. Consumers could receive letters, calls and other forms of harassment from collection agencies attempting to collect the unpaid bills.
Services
Debt settlement companies, according to a report on MSN's Money Central, promise a wide range of services, including lowering interest rates, reducing your debt and fielding collection calls. The company may offer to assume debt management, whereby the debt settlement company takes over the debt, and the consumer makes payments to the company directly. However, according to both the Better Business Bureau and the NCLC, these services may not be accomplished as promised, and, in some cases, may not be performed at all.
Fees
Whether or not debt settlement companies follow through on their promised services, you will pay a fee. Fees vary, but the Better Business Bureau and the NCLC report some companies charge from 15 percent to 25 percent of the settlement savings in addition to a monthly service fees. Consumers sometimes discover that the savings of a debt settlement plan vanish with the payments required from the debt settlement company. As a result, many consumers never complete the program, dropping out before a settlement is reached and making the debt problem worse.
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