Surviving the Debt Consolidation Maze

Debt Settlement

If there’s a debt consolidation program that can seem like magic, it’s Debt Settlement and there are certainly advantages. But they come at a price. The big selling point of debt settlement is that it can get you out of debt relatively quickly, often in substantially less than three years, and you can save a lot of money. As good as that sounds, the devil’s in the details. Upon entering a debt settlement agreement, you’ll be told to:

• Stop making your credit card payments so that debts eventually are turned over to collection agents
• Pay a predetermined monthly amount to the debt settlement company to hold in trust for you
• Once the trust account contains enough money to be attractive to creditors, the debt settlement firm negotiates on your behalf to settle the outstanding debt for less than the total owed

Debt settlement is based on the logic that creditors would prefer to get something rather than nothing and, by the time negotiations begin, nothing is exactly what they’re getting. As months pass without payments being made on debts, you can expect you credit score to plummet. Indeed by the time negotiations begin, the debts have generally been turned over to collection agencies with the original creditor having written the debt off. Typically, these collection agencies keep about half of any money they collect giving the other half to the original creditor. Because something is better than nothing, debt settlements are often made for half or less of the original obligation.

From the standpoint of the borrower, the advantages of debt settlement are becoming free of debt in a rather short time while making a much smaller monthly payment. But the disadvantages are also substantial. Debts that are settled are reported as such to credit reporting agencies and future creditors will view a settled debt negatively compared to one that has been paid off. Of course, the overall credit score will be dramatically lowered and building it back up is a long, difficult road. An important intangible side effect of debt settlement is that most people will bear some psychological guilt at having failed to repay debts fully.

While debt consolidation services can be very helpful, especially when your financial situation has become desperate, many of the steps that are taken by these agencies can be accomplished by dedicated individuals. We encourage you to take a look at our accompanying article, Self-Help Debt Reduction. If you find that it’s time to get help, we invite you to the reviews of CareOne, DebtWave Credit Counseling and Coastal Credit Solutions as well as other highly ranked firms that may meet your personal needs. At TopTenREVIEW, We Do the Research So You Don’t Have To.™