You have probably seen the ads that promise to get you debt free in a short amount of time. If you feel crushed under the weight of your debts, this could sound like music to your ears. Debt settlement companies make big promises of relief from your debts, but they do not always reveal the entire truth about their debt settlement programs or the high risks involved.
Debt settlement is an option you may be considering if you have more debt than you can pay and you have already missed payments. You might even be dealing with a collection agency, and you are looking for a way to handle your debts. However, use caution. Some debt settlement companies prey on your desperation by making promises they can’t deliver.
What they aren’t telling you
The debt settlement company promises to negotiate with your creditors to reduce what you owe or your payment amount, perhaps even obtaining forgiveness for certain debts. However, the following steps may understandably seem risky to you:
- You must agree to stop sending any payments to your creditors so they will assume you are not able to pay what you owe.
- The payments you would normally send to your creditors you will instead deposit into an account with the settlement company.
- When the settlement company determines you have enough money in your account, they will offer that amount as a lump sum payoff to the creditor.
- During the months or years that you deposit money into your account, creditors may still harass you for payments you are missing.
- Interest and fees will continue to accrue on your outstanding balance.
- Your creditors might also take you to court to obtain what you owe.
- Creditors will likely report your delinquent payments to credit reporting agencies.
Settlement companies will not tell you that creditors are often reluctant to negotiate with them, and after all the trouble, you may end up with an even bigger debt problem. Even if negotiations are successful, you will likely have a large fee to pay the settlement company, and the IRS may tax you for any forgiven debt.
What choice do I have?
One option to consider is bankruptcy. As soon as you file for bankruptcy, creditors must cease any debt collection actions. Bankruptcy is often faster, less stressful and more successful than debt settlement, and many find it does not take long to rebuild their credit scores afterward. Each situation is unique, so it is critical that you discuss your options and goals with a trustworthy and experienced legal professional.