Is a Debt Settlement Program a Good Idea? – Everything You Should Know About It
If your credit card or personal loan debt is too high, you may consider using a private debt settlement company to reduce the amount. These for-profit entities often collect 15-25% of the debt.
When you enter into an agreement with a debt settlement company, you must follow several recommendations, such as stop making payments to your creditors, whether you are paying a loan or your credit card.
Instead, you must make payments to the debt relief company, which go into an escrow or savings account to which debt settlement professionals have access.
This money is used to pay creditors according to the debt settlement terms and cover the fees for these services.
While you're paying these sums, the debt settlement company handles negotiations, trying to get your creditor to agree to lower the amount of money you owe.
Is Using Debt Settlement Companies a Good Idea?
If you're struggling with your financial situation and don't have enough money to pay your credit card or loan debt, a debt settlement, also known as debt relief, may be a good option.
However, whether you work with a debt settlement company or handle the negotiations yourself, this process can take two to three years.
In the meantime, late fees and additional interest accumulate on your debt, which can negatively impact your credit score. That's one of the drawbacks of debt relief programs.
What Debts Are Eligible For Debt Settlement?
There are two types of debts: secured (loans granted with collateral) and unsecured (borrowers don't give assets as collateral). Which are eligible for debt settlement?
Overall, most unsecured loans are eligible for debt settlement. These types of debts may include the following:
However, creditors aren't required to accept a debt relief proposal. In addition, several types of debts are not eligible for debt settlement. These are:
Before entering an agreement with a debt settlement company, you should make sure your debt is eligible for debt relief.
You can find more information on what loans are eligible for debt settlement on the websites of the Federal Trade Commission, the State's Attorney General, and the Consumer Financial Protection Bureau.
Also, you should consider the pros and cons of working with a debt management company before making a decision on your debt relief strategy. Review them below!
Pros of Using a Debt Settlement Company
These are a few of the most important benefits of using a debt settlement company:
Risks Of Using a Debt Settlement Company
Working with a debt settlement company to reduce or eliminate your debt also poses several risks, which are mostly linked to the debt relief process itself. These may include the following:
As mentioned, debt management companies may charge up to 25% of the debt they're asked to settle, which may account for up to $3,000 or more.
Also, these fees don't go into your debt but into the debt settlement companies' pockets. As a result, you'll have to use most of the savings from the debt settlement amount to cover these costs.
Credit Score Reduction
While debt settlement is a good option for those struggling with huge personal loan payments and credit card debts, this strategy can negatively affect their financial life, as their credit score will likely plummet.
Since most debt settlement companies often ask the average consumer to stop making payments to their creditors and put their money into a savings account instead, starting this process can hurt their credit score.
When your account is marked as "settled," your credit score is also affected.
Some creditors accept the debt relief proposal and agree to settle the debt in exchange for a reduced lump sum payment. However, in this case, you may still have to pay taxes on your savings.
The Internal Revenue Service (IRS) sees the forgiven debt as income, so it's taxable.
Are There Other Options Besides Debt Settlement?
Debt settlement may be too risky for some people. If that's your case, there are other options to reduce your debt, whether it's related to your credit card or a personal loan.
If you're struggling with the interest payment for a personal loan or to improve your financial health, debt consolidation may be a good option.
Essentially, debt consolidation is when you take another loan to pay off your existing credit card or current loan debt.
As a result, you only have to make one payment instead of many. Debt consolidation is also a good idea because it offers options for those who have student loans.
Many don't recommend this option, but filing for bankruptcy can remove most outstanding loan and credit card debt if you cannot reach a debt settlement with your creditor.
However, you cannot file for bankruptcy to reduce your debt if it's related to a business, mortgage, or student loan.
Credit or Debt Counseling
Besides debt settlement companies, you can also find agencies focused on credit or debt counseling. These entities are non-profit and can help you develop a debt management plan to pay off your debts and improve your financial situation.
A debt management plan provided by a credit counseling agency may be all you need to ease your credit card or loan debt burden. Therefore, when debt settlement is not an option, credit counseling agencies can help.
Additionally, when struggling to pay off your credit card, you can also consider a balance transfer. As such, you only have to transfer your credit card debt to a new credit card with a lower monthly interest payment.
Final Thoughts: Why Should You Work With A Debt Settlement Company?
Sometimes, debts can reach a point where you just can't pay them off, especially if there is an emergency expense or a reduction in pay.
Huge debts are overwhelming and can harm your personal and financial life, whether they are related to your credit card or a loan.
In these cases, the Americor's debt settlement program may be a solution. However, you must make sure you approach this strategy carefully.
Working with a debt settlement company won't solve your spending issues or protect you from other future debt. However, professionals can work with your creditors to alleviate your debt burden.