Amid the slew of consumer debt relief options, there is no right answer to the question of whether to pursue a debt settlement program. It all depends on your personal and financial circumstances. If you are able to make your own arrangements with creditors – for example, by lowering your interest rate or waiving late and over-limit fees on credit cards – it may be less expensive than paying for help through a debt relief company.
In general, debt settlement companies negotiate with creditors to settle for a smaller amount than you currently owe, usually at least half of the principal balance. They typically charge a fee for their services, which they deduct from the total of your enrolled debt. Some of these programs also impose a monthly deposit from you into an account that the debt relief services manages.
However, it’s important to remember that debt settlement only works if both parties agree to the terms of the deal. If your creditors don’t agree, they could pursue collections and file a lawsuit against you to collect the remaining unpaid debt, even after you pay the debt relief company. And if you miss payments to your creditors as part of the debt settlement program, your credit score can tank, and you’ll face the prospect of paying more in the long run.
Another concern is that some of these debt relief companies encourage you to stop making credit card payments in order to save money for the lump sum payment they will make to your creditors. This can have a negative impact on your credit scores and potentially restart the statute of limitations, which limits how long your creditors can attempt to collect debt.
Many debt relief companies overpromise and overcharge, according to the Consumer Financial Protection Bureau (CFPB), whose website includes a database of complaints about these types of programs. And you might wind up with a lower credit score than you would have had without the program, and you may not be able to qualify for new loans or lines of credit because of your diminished credit history.
There are several other options available to consumers, including seeking the advice of a nonprofit credit counseling service and, in some cases, negotiating directly with creditors to take advantage of their willingness to work with consumers. Some of these alternatives, such as debt consolidation, may allow you to replace multiple monthly bills with a single, manageable payment – and will almost always save you money and avoid credit-damaging debt settlement.
In addition, you should consider the pros and cons of filing for bankruptcy if you don’t think you can repay your unsecured debts within five years, even with extreme steps to cut spending. While it’s not a welcome solution, bankruptcy may be the best option if you can’t get on your feet financially. It’s an option that should be considered carefully, but only after exhausting all other resources. A good bankruptcy attorney can help you weigh your options.