When you’re having trouble paying your credit cards, it can be tempting to look into credit card debt settlement. Before you decide to go this route, you should understand the process and risks. In addition, you should also be aware of alternatives to working with a debt settlement company.
Alternatives to Using a Debt Settlement Company
There are several other options you can consider before going to a third-party debt settlement program. First, you can reach out to your credit card issuer yourself to explore credit card debt payment options. You can also engage a non-profit credit counselor to help you manage your debt and learn about your options. The Federal Trade Commission offers advice on choosing a credit counselor.
Additionally, you could consult an attorney about the possibility of declaring bankruptcy. Options exist that may allow you to discharge your debts while retaining property such as your house or car. However, you can expect to pay both attorneys’ fees and government filing fees as part of the bankruptcy process. For more information on all of these options, see the Federal Trade Commission’s Coping with Debt website.
Credit Card Debt Settlement Basics
While your lender and non-profit credit counselors will talk to you for free about payment options, some debt settlement companies are a for-profit service that attempt to negotiate the debt you owe. The goal of this service is to have some portion of your debt forgiven in exchange for a lump sum payment.
First, a debt settlement company may ask you to make a payment each month to a fund in order to have the money necessary to reach a negotiated settlement with your credit card issuers or other creditors. A debt settlement company may even instruct you to stop making payments to your creditors, which can negatively impact your credit report and score. And, if a settlement is reached, it will use your funds to make a payment to your creditors to settle your debt.
Working With a Debt Settlement Company
You can potentially save money when a debt settlement company is able to successfully have a portion of your debt forgiven. The debt settlement company may have existing relationships with credit card issuers and be skilled at working on your behalf. In addition, it can be a convenience to have your debts negotiated by a third-party, rather working on it yourself.
However, there are some risks. First, these companies may ask you to make monthly payments into a special savings account for years before settling all of your debts. But if you are unable to make these payments, you risk having to drop out of the program and being worse off than when you started.
In addition, there’s no guarantee that the debt settlement process will be successful, and consumers may not find the relief they had hoped for. If a debt settlement company convinces you to stop paying your creditors, your delinquencies and defaults will be reported to the major consumer credit bureaus and can damage your credit score.
Finally, there are debt settlement scams that make promises that they’re unable to deliver or that misrepresent their abilities. For more information on debt settlement programs and potential scams, visit the Federal Trade Commission’s website.
Only by understanding all of the potential advantages and disadvantages of debt settlement programs, and the alternatives, can you choose the best way to manage your debt.