Debt settlement is not a silver bullet that will solve your financial problems. It is a last resort for those facing the very real prospect of bankruptcy. The consequences of debt settlement will follow you for years to come, even after you are completely debt-free. However, for most people, it is still preferable to filing for bankruptcy.
Debt Settlement
While it is possible to negotiate with credit card companies yourself, most people tend to do it through a specialist company. The first step is to stop paying your bills. This may be counter-intuitive, but it's the quickest way to drop your credit score. Take the money that you were going to use to pay the bills and give it to the debt settlement company. The company will put it into an account for you, after taking a chunk off the top as its fee. After several months, your credit score will plummet. This is the best time to negotiate with lenders. The only way they will forgive your debts is if they feel that there is no other way for them to get their money. The settlement company will negotiate on your behalf. You will have to agree to pay off part of the debt immediately, in exchange for the lender forgiving the rest. The company will take the money that has accumulated in your account and use it to make that payment.
Consequences
There are many downsides to debt settlement. The IRS considers forgiven debt a form of income. You will have to pay income tax on it. Your credit score will be in the gutter for years. You will not be able to get any sort of credit, not even a store card or a cell phone contract. The debt settlement will stay on your credit report for seven years. If you are financially responsible during that time, you can rebuild your credit history, but it's not easy. Most people get into debt because of overspending. Debt settlement will do nothing to change your spending habits. You must do that yourself.
For-Profit vs. Non-Profit
When choosing a debt settlement company, it's tempting to go with a non-profit one. However, this isn't always the best decision. Just because a company is non-profit, it doesn't mean it won't charge you fees. All debt settlement companies charge fees. After all, they need to pay their staff. A non-profit company can be just as unscrupulous as a for-profit one. Choose a company with a good track record. Ask your friends who have been through debt settlement to recommend a company, or check with your local Better Business Bureau.
Do It Yourself
When you are in debt, the last thing you want to do is waste money on a middleman. That is what a debt settlement company is -- a middleman who negotiates between you and your lenders. Some people choose to do it themselves. It is possible to negotiate with lenders yourself. You can do exactly what the company would do and save yourself the fees. Be prepared to do a lot of research and a mountain of paperwork. Specialist debt settlement companies do this every day. You would be doing it for the first time.
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