Debt
Settlement
– What to
Expect, and What to Avoid
Much like Credit Counseling, Debt Settlement agencies work
with you and your creditors to help you become debt free. However, unlike Credit
Counseling or Debt Reduction agencies, who work with your creditors to get you a
lower interest rate, Debt Settlement agencies work with your creditors to reduce
your debt balance, sometimes by as much as 50-75%! Sounds pretty easy? There are
some drawbacks and things to avoid…
People who are extremely in debt and are without the means
to repay should be the only ones to use debt settlement and should not be used
by persons who are looking to get something for nothing.
When you go through a debt settlement agency, typically
there are some startup fees involved. This fee should not be higher than what
you have agreed to pay every month. Also, the agency will probably charge a
monthly maintenance fee.
After you agree to join their program, the settlement
agency will start collecting money from you on a monthly basis and putting this
money into an escrow account where it can build until you have enough money to
begin settling one or more of your accounts. After an ‘accumulate’ amount is
reached, the agency will then contact your creditors and begin negotiating a
reduced payoff of your account. This money is then sent to that creditor and you
begin accumulating money into your escrow account again. Most settlement
agencies also usually charge a settlement fee as well, often a percentage of the
amount that they have saved you.
Keep in mind that while you are accumulating money in order
to pay off these debts you are still accumulating late fees and interest
charges, which is increasing your balance. If your agencies charge you a
settlement fee, be sure that the percentage of savings they apply their fee to
is on the original balance, not the current balance!
Because you are not paying your debts your creditors are
going to report your accounts as delinquent and your credit report is going to
be very negative for several years. It is up to you to weigh the benefits of
getting out of debt using this debt settlement method versus filing bankruptcy
or handling the matters yourself.
Proper
budget planning can help you avoid this situation
altogether.
Be sure to read our related articles on
Debt Consolidation and
Credit Counseling!
Please visit our
sponsor page if you are interested in learning more about Debt Settlement.
