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For anyone struggling with high credit card debt, the prospect of wiping the slate by settling the debt for pennies on the dollar may seem like a dream come true. However, as many consumers discover the hard way, debt settlement often is not the best option.
Debt settlement companies advertise appealing benefits for people saddled with overdue payments and in over their head in credit card debt. Most debt settlement companies promise to:
- Satisfy debts at as low as 50-60 percent of what is actually owed.
- Put debt-ridden consumers back in the black by lowering their debt obligations, and make them completely debt free in as little as two years.
- Negotiate with creditors, so consumers get one, integrated solution that fits the amount of money they have available to pay down their debt.
- Put an end to collection calls; the debt settlement company will handle all those harassing calls.
- Negotiate with creditors to minimize the effect of the debt settlement on credit scores.
With promises like this, it’s not wonder that many consumers mired in credit card debt decide that debt settlement is the obvious answer to their prayers. Unfortunately, however, there are numerous drawbacks to debt settlement programs, as consumers venturing into a debt settlement agreement often discover too late. Here are some of the cons of debt settlement:
Your Credit Rating Will Likely Take a Dive. Credit card companies and other creditors don’t like debt settlement, and they make it a difficult solution to pursue. Most creditors won’t even discuss debt settlements unless the consumer is at least three to six months behind on their credit card payments. By that time, your credit rating will be shot, and you will have endured months of harassing collection calls.
During the settlement process as well, consumers can expect to see continued drops in credit until they’ve accumulated enough money to start paying off their credit card debt. And even if the debt is successfully settled, debts may not necessarily appear as “paid in full” on credit reports. In most cases, forgiven loans will appear as “settled,” which will continue to negatively impact the person’s credit score for years.
Debt Settlement Companies Charge High, Upfront Fees. While settling credit card debt for as low as 50 to 60 cents on the dollars certainly would save consumers a considerable amount of money on the debts owed, the savings are not as big as they might seem. Debt settlement companies charge a sizeable fee for their services, and most charge a confusing array of fees, making it hard to determine the true costs before signing up for the service. Just as bad, consumers are generally required to pay a hefty chunk of the fees up front.
There Are No Guarantees. Despite all the up front fees, there is no guarantee that the company will actually deliver on the services promised. According to the National Consumer Law Center, which has looked into the practice of debt settlement companies, there are numerous stories of consumers who pay through the nose for debt settlement services, without getting any benefits in return. One reason is that many creditors refuse to play ball, and escalate the account instead of negotiating with the debt settlement company, even to the point of suing the consumer for the debt.
Debt Settlement Doesn’t Cover All Types of Loans. Consumers with secured loans, such as car loans, mortgages, etc, will be unable to use debt settlement to relieve those obligations. In addition, not all credit card companies will forgive debt, and many times a consumer’s outstanding accounts will be sold to a collection agency. Consumers whose debt is settled with one creditor may be unpleasantly surprised to receive a call from a collection agency on behalf of another creditor mere weeks after concluding the settlement process.
Uncle Sam Gets Paid Too. Consumers who successfully get their debt settled are still not out of the woods. In addition to the fees the settlement agency collects and the money they pay to their creditors, consumers who settle their debt will also have to fork over a percentage of forgiven loans to the U.S. government as tax on “income.”
In short, when considering debt settlement, proceed with caution. At the very least, make sure you know all the fees and costs involved up front; once everything is tallied up, it might well be more cost-effective to hire a consumer (or bankruptcy) lawyer to help you with your debt problems and negotiate with your creditors.
There are many alternatives to debt settlement: for those with good credit, other options, such as 0% balance transfers or other types of debt consolidation may be more advantageous. Calling a creditor directly to negotiate a payment arrangement on your credit card debt can often yield surprising results as well, even if you have bad credit. In addition, many consumers find it very helpful to seek the services of a non-profit debt counseling agency to help them sort through their financial situation and decide on the best course of action.
