Dangers of Debt Settlement

These days advertisements for debt settlement companies are all over the TV, Internet and radio. The promises of decreased debt can be quite tempting for consumers who are struggling financially. However, it pays to get all the facts before turning to a settlement company to handle your debt problem. While these companies promise to reduce your debt what they may not be clear about is the effect of their services on your credit report.

The first step in debt settlement is providing the settlement company with details regarding your creditors and how much you owe each one. This information will be analyzed and the debt settlement specialist working with you will devise a repayment plan supposedly designed to reduce your debt and save you money. You will pay a monthly payment to the settlement company who will distribute it among your creditors.

So what does the settlement company get out of the deal? They take up to four of your payments as compensation for their services. After that, your payments are put in an account and when it has reached a certain balance the settlement company will negotiate debt settlement details with your creditors. While the idea of paying off your debt this way may seem convenient, there are some hidden drawbacks.

A creditor is only able to settle an account after it is charged off. In order for an account to be charged off, there must be six months of consecutive non-payment. This racks up late fees and shows up in a negative manner on your credit report.

You may already know that an item can stay on your credit report for seven years, however you may not know that time resets when you make a debt settlement. When the settled debt is paid off, it is not removed from your credit report. The debt will be marked Paid Settled or Charged-Off Settled.

If you’re overwhelmed by debt consider various alternatives to debt settlement. Credit counseling is one alternative that can help you pay down your debt in a convenient and effective way. You might also want to consider negotiating with your creditors on your own. Many creditors do have special hardship programs for those experiencing financial problems. These programs may reduce your late fees and interest rate for a specified period of time while you get your finances in order.