What is a debt settlement company? How do these companies work? How much do they charge? Should I use one to get rid of my credit card debt?
What is a debt settlement company? How do these companies work? How much
do they charge? Should I use one to get rid of my credit card debt?
Debt settlement companies work as a middleman between you and your creditor. If all goes well (and that’s a big if), you should be able to settle your debts for cents on the dollar. You’ll also pay a fee to the debt settlement company, usually either a percentage of the total debt you have or a percentage of the total amount forgiven.
If you’d asked me a few years ago about debt settlement companies, I probably would have told you to avoid them. But things have changed a bit. The Bankruptcy Reform Act of 2005 made it harder for individuals to file bankruptcy, which is always the last resort.
Unfortunately, simultaneously consumers racked up so much debt that counseling companies—which are higher up on my list if you need help managing your debt—are sometimes unable to help. So if you fall into this camp, debt settlement may be something to consider.
Here’s how it works: The debt settlement company will direct you to stop paying your creditor and instead send the money directly to them each month. The company’s goal is to demonstrate to your creditor that you don’t have the money to pay up—that’s your leverage. After a few months, the company will typically go to the creditor and say, “I’m holding X dollars on behalf of your customer. He doesn’t have the money to pay you, so you should take this amount as a settlement or you’ll end up with nothing.” If the creditor wants to get paid badly enough, it will take the money.
All of this sounds great, but there are negatives. For starters, during the three-to four-month stretch that you’re not paying your creditor, your account will accrue late fees and possibly even “over the limit” fees. Both of those fees add to the total debt and to the debt settlement company’s fee. Not paying your creditors can do a serious number on your credit score, and having a settlement on your credit history drags it down even further. If you start out in the high 600s, for example, your credit score could be well into the 400s by the time you’ve gone through debt settlement, especially if you settle more than one account.
And besides: You really don’t need to hire a debt settlement company to negotiate with your creditors. Unless you have multiple accounts that you need to negotiate and you think the project is just too big to tackle on your own, you’re better off just calling your creditors directly. For what to say, see the script included with the next question.
Debt settlement companies work as a middleman between you and your creditor. If all goes well (and that’s a big if), you should be able to settle your debts for cents on the dollar. You’ll also pay a fee to the debt settlement company, usually either a percentage of the total debt you have or a percentage of the total amount forgiven.
If you’d asked me a few years ago about debt settlement companies, I probably would have told you to avoid them. But things have changed a bit. The Bankruptcy Reform Act of 2005 made it harder for individuals to file bankruptcy, which is always the last resort.
Unfortunately, simultaneously consumers racked up so much debt that counseling companies—which are higher up on my list if you need help managing your debt—are sometimes unable to help. So if you fall into this camp, debt settlement may be something to consider.
Here’s how it works: The debt settlement company will direct you to stop paying your creditor and instead send the money directly to them each month. The company’s goal is to demonstrate to your creditor that you don’t have the money to pay up—that’s your leverage. After a few months, the company will typically go to the creditor and say, “I’m holding X dollars on behalf of your customer. He doesn’t have the money to pay you, so you should take this amount as a settlement or you’ll end up with nothing.” If the creditor wants to get paid badly enough, it will take the money.
All of this sounds great, but there are negatives. For starters, during the three-to four-month stretch that you’re not paying your creditor, your account will accrue late fees and possibly even “over the limit” fees. Both of those fees add to the total debt and to the debt settlement company’s fee. Not paying your creditors can do a serious number on your credit score, and having a settlement on your credit history drags it down even further. If you start out in the high 600s, for example, your credit score could be well into the 400s by the time you’ve gone through debt settlement, especially if you settle more than one account.
And besides: You really don’t need to hire a debt settlement company to negotiate with your creditors. Unless you have multiple accounts that you need to negotiate and you think the project is just too big to tackle on your own, you’re better off just calling your creditors directly. For what to say, see the script included with the next question.
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