Debt Settlement Program Guide

The availability of consumer credit and personal loans allow people to make many purchases that they might not be able to afford otherwise, but excessive borrowing can lead to burdensome levels of debt. Once you amass a large debt load, it can take years of careful budgeting to get debt-free, which prompts many debtors to search for other means of getting out of debt. Debt settlement programs involve hiring professional services to negotiate with your creditors to lower your debts.

Debt Settlement Basics

Debt settlement companies work on behalf of debtors to bargain with creditors and persuade them to reduce debts. Debt settlement companies may make attractive claims about their programs, such as being able to reduce the amount you have to pay toward your debt by up to 50 or more in a short period of time. While a debt settlement program may result in lower debts, there is no guarantee that a settlement company will be able to convince a lender to reduce your debt, and the settlement process can take months or even years. If you fail to make payments on your credit card during the debt settlement process, you may accrue fees that increase the amount that you owe.

Drawbacks

There are several potential drawbacks of using debt settlement programs. The Federal Trade Commission states that debt settlement can have a severe and long-lasting impact on your credit score, and that debt settlement programs charge fees that diminish any debt savings you gain. In addition, the Internal Revenue Service may consider the money you save due to debt settlement to be taxable income.

Predatory Practices

Another problem with debt management programs is that some debt settlement companies may deliberately mislead or deceive customers by overstating potential benefits or failing to cite risks, while others may partake in illegal activities. For example, the United States Government Accountability Office states that it called 20 debt settlement companies posing as consumers and 17 of those companies said they collect fees before debts are settled, a practice that the FTC has labeled as harmful.

Considerations

If you decide to pursue a debt settlement program, research thoroughly any company you consider before going forward. The FTC recommends that consumers be wary of companies that charge fees before debt are settled, tout new government programs, guarantee that they can reduce or eliminate debt or tell you to stop communicating with creditors.