Many companies promise to be able to settle a debt for pennies on the dollar, meaning that you can pay a small percentage of your debt and the debt collector will consider it paid. Unfortunately, it is not that simple and there are no guarantees that a debt collector will agree to any kind of settlement, much less one that offers such a low percent of the debt.
Debt Settlement Companies
Many companies negotiate debt settlement on your behalf. However, this is a lengthy process and there are no guarantees. When you work with a debt settlement company, you stop making payments on the debt and instead deposit money in your account with the settlement company. The settlement company takes a cut of the money as its fee and saves up the rest as the settlement. When the company thinks you have accumulated enough money to settle the debt, usually 50 to 60 percent, according to Bankrate, it will call the debt collector and try to negotiate a payment.
Do-It-Yourself Settlement
Individuals can call companies that hold debts and try to negotiate settlements without the help of a middle man. This has the advantage of avoiding the fees. However, individuals have less leverage than debt settlement companies. If you do happen to get a debt collector to agree to a settlement, get the agreement in writing before you send any money. The agreement should state the amount that you will pay and the fact that the debt collection company will report the account as paid and not pursue you for further repayment.
Negative Consequences
Even if you can settle a debt, you will end up with a few negative consequences. First, your credit report will show that you paid the debt off for less than you owed, which could cause your score to drop by as much as 100 points, according to the MyFICO website. Second, your credit report will take a few hits while you are saving up money to make the settlement. During this time, collection agents will likely call you to try to collect and you could be sued or have your wages garnished.
Alternatives
If you are concerned about protecting your credit score, you should not settle a credit card debt. Instead, call the credit card company and explain your situation before the account gets charged off and sent to a collections agency. Ask about reducing your monthly payment temporarily. If the company believes you are acting in good faith, it might grant this request, which will keep your account in good standing. Another option is to enroll in a debt management plan, in which a company negotiates a payment plan with your creditor and makes regular monthly payments until your debt is paid off. If you cannot afford to make any monthly payments, negotiation, debt settlement and debt management will not help you. Instead, you should contact a lawyer and ask about filing bankruptcy.
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