What is debt settlement?

debt settlement is a process that involves offering education to consumers about how to eliminate debts that the consumer can’t pay by themselves.  Typically a debt settlement Agency, either for-profit or non-profit, represents the consumer and renegotiates payment terms with the creditors of the consumer.  A debt management plan and budget are then set to help the consumer pay the creditor.

Pros of debt settlement

• The consumer doesn’t have to worry about negotiating with creditors, the agency takes care of this for you.
• Because you are now in a “plan”, your creditors may accept lower payments (10-20% reductions are common).
• Interest rates can be negotiated lower.

Cons of debt settlement

• Your credit history will be damaged.  Most mortgage companies will not allow you to refinance for a certain time period after participating in debt settlement.  From a credit risk perspective, it is commonly equated with filing a Chapter 13 bankruptcy.
• You are typically required to go behind on your debt payments before negotiations can begin.
• Your accounts are closed.  During the renegotiation process your creditors will close your accounts as part of the plan so you no longer will be able to use your credit cards.
• Only credit cards can be included in debt settlement.  Mortgage loans, Auto Loans, etc are not included in debt settlement.
• You lose control of paying your debts.  You are dependent on the debt settlement company to pay your bills for you correctly and on time.

How much does debt settlement cost?

• The cost of debt settlement varies by state and by the amount of credit card debt you are trying to settle.  A typical fee is 15-20% of the debt enrolled.  A significant portion of your debt payments is applied each month until the total fee is covered.

Who Should Participate in debt settlement?

• You may be a good candidate for debt settlement if you cannot afford your credit card payments, you have over $10,000 in credit card debt, and you have no other options.  debt settlement is typically a last resort before filing for bankruptcy protection.