Debt reduction strategies that work
Debt settlements offer a quick but relatively costly solution to overwhelming debt. If less extreme debt reduction strategies are failing and you're still drowning in an unending torrent of past due bills, a debt settlement program can be a good alternative to declaring bankruptcy.
How Debt Settlements Work
Settlements leading to debt elimination generally work like this: you sign up with a third-party agency that negotiates a lump-sum payment with a particular creditor. The one-time payment can be anywhere from 20 to 75 percent of the total amount you owe. Your creditor would much rather get this percentage of the money you owe than have you declare bankruptcy, in which case they would get nothing.
The creditor will then report your debt as settled, and the debt balance will show on your credit report as $0. However, though this strategy can reduce debt, it cannot undo any harm already done to your credit rating. All missed payments and defaults will still show. What's worse is that creditors will not negotiate debt settlements with debtors whose accounts are current or in good standing. You have to be in trouble before it becomes an option, and the evidence of this trouble will remain on .
Advantages and Disadvantages of Debt Settlement Programs
The primary advantage of debt settlements is that they provide full and immediate debt relief. You won't have to deal with bills you can't pay any longer. These payments settle your account in full and help you avoid filing for bankruptcy.
However, there are many risks and disadvantages. First of all, the companies that negotiate debt settlements on your behalf charge exorbitant fees. While the sum of your settlement and the fees you'll owe are typically less than your overall debt, you'll still have to have enough cash on hand to pay the agency off. The actual fees the agency will charge are often a mystery, too. Many debt reduction companies make it extremely complicated for consumers to figure out their fee schedules, throwing a huge and confusing collection of percentages and figures at them and refusing to give straight answers.
This strategy is also very bad for . While your debt is reported as settled, credit reporting agencies know that you settled for less than you owe, and this can be financial suicide. It can be very difficult to secure future credit if you have a settlement on your record.
Experts warn consumers to be wary of dealing with agencies that make promises that seem too good to be true. Thousands of people have enrolled with debt settlement agencies, only to pay thousands of dollars in fees without getting anything done. Research agencies with your local Better Business Bureau, or hire a consumer or bankruptcy attorney to negotiate a settlement on your behalf. Legal fees can be steep, but at least you'll get the results you're looking for.