Sometimes, even if you prepare a budget well, debt still piles up due to job loss, unexpected bills and increases in the cost of living that don't correspond with pay increases. Often, people look to debt settlement if debts become overwhelming. This strategy for coping with what you owe isn't for everyone.
How Settlement Works
When you opt to settle your debt, you hire a company to negotiate with your creditors so the creditors forgive some or all of what you owe. In return for providing these services, the settlement company receives a fee. For some people, this fee is well worth it, since using a settlement company saves them the headache of dealing with the creditors alone. Additionally, many save more in the settlement than they pay in fees. However, the reality is that if a company can negotiate with creditors, so can you. Furthermore, not all companies charge the same fees, and you can't guarantee your savings will make the fee economical, particularly because you still have to pay taxes on the amount deducted from what you owe.
Clarity
The only way you can accurately measure whether debt settlement will work for you is if your debt settlement company is clear and upfront about fees and procedures. Some companies are good about this, but others are very confusing and catch customers off-guard.
Credit Impact
Most people enter debt settlement because they want to avoid the negative impacts of bankruptcy on their credit. However, settlement often sends your credit score into a nosedive. This is because creditors report to the credit bureaus that your payment was settled or partially paid instead of paid in full--other creditors don't like to see that you've only paid part of a debt. On the other hand, some creditors may see your debt settlement as a proactive means of avoiding more restrictive bankruptcy, so settlement doesn't necessarily mean you can't get credit in the future.
Creditor Harassment
Using a debt settlement company entitles you to request that all your creditors contact the debt settlement company instead of you about the debt. This means you don't have to deal with harassing letters, emails, phone calls or personal visits. However, this doesn't mean you can ignore the debt. The debt settlement company still will want to interact with you, and you'll have to provide creditors with information for the debt settlement company.
Debt Amount
Debt settlement works well when your debt is significant because the savings potential is greater, according to the SolveYourProblem website. Some settlement companies won't work with you unless you have at least $10,000 in debt. If you're just a few months behind, fees may negate your savings quickly.
The Bottom Line
Debt consolidation isn't a good choice if your debt is small, or if you already have a shaky credit score. It also isn't a good idea if you already have tried to settle with creditors and they declined your offer. Settlement companies will typically offer creditors less than you might offer on your own, so creditors likely will turn down your company if you haven't been able to settle independently.
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