Reducing Credit Card Debt Part 5 - Debt Settlement Companies

This may be the most controversial aspect of consumer debt relief: debt settlement companies. There are definite differences between debt settlement companies and other debt relief companies. Let's examine some of these differences.

A debt settlement company is one who says it will intercede on your behalf with your creditors to reduce your debt 50-75%, or "settle your debts for pennies on the dollar". Debt settlement companies can't guarantee this, nor will they even attempt it without having you pay them a hefty fee, sometimes as much as 15-20% of the total amount of debt you're trying to rid yourself of in the first place. Let's do a little math here…$25,000 total debt, $5000 fee to debt settlement company, and no assurance that the lenders will even go for this, all the while your credit is taking a near-fatal hit.

A debt management firm, on the other hand, or a non-profit credit counseling service works to lower the interest rates on your account with the goal of reducing the monthly payments you're now saddled with. Paying more toward the principal instead of interest charges reduces your debts by years. Most times you can tell the difference between debt settlement companies and debt management companies by the fees and time it takes to start satisfying creditors. (Do be aware that many predatory debt settlement companies claim to be non-profit, so do your due diligence, and check them out with the Better Business Bureau, etc.)

There are many horror stories associated with debt settlement companies out there. Let's look at some of the facts about them. First of all, no lender is under any obligation to reduce your indebtedness to them to any degree. If you were to approach them on your own when things get bad, you are far more likely to secure a better result. Your creditors won't see a dime until you've accumulated enough to pay them a settlement, which could be some time down the road. You've paid your fee to the debt settlement company, and now you're collecting money in this account in hopes of making a one-time settlement payment. In the meantime, no payments are being made to your creditors, who are dutifully reporting this to the credit agencies, thus further worsening your credit report. A full 35% of your FICO score is calculated on the timeliness of your payments, which you've suspended for the foreseeable future. Also, even if this scenario were to work out for you, the difference between the amounts you owe and the settlement amount will be a taxable event, possibly wiping out a large portion of what you think you may have saved!

And one more bad thing: despite claims to the contrary, they can't really stop the phone calls. You'll simply be referring them to debt settlement company, which will do you no good.

As you may have guessed by now, it would be very wise to avoid debt settlement companies and choose another alternative. Anything they can do you can do better, and cheaper!