Debt settlement is intended for consumers that are past due (90+ days behind) on their credit card payments. Most settlement companies advertise that they can help negotiate your balances and lower your monthly payments. They disguise themselves as Debt relief, Debt consolidation, Debt Management or Debt forgiveness companies.
What most debt settlement companies will and will not tell you...
Truth: Most of the major credit card companies will not reduce your debt by more than 40% of the balance owed. In fact, many creditors will only reduce the balance by 20%.
Truth: Some companies may not charge upfront fees; however, they are going to charge you a fee that ranges from 15-25% of the total amount being enrolled. Let’s say you are enrolling $35,000 into a debt settlement program, their fees will range from $5,250 to $8,750. That amount is then built into your payment. So if you do a 24 month program, $218.75- $364.58 of your payment will go to the settlement company. In addition to the 15-25%, most settlement companies also charge a monthly maintenance fee.
Truth: Almost every credit card/loan company or bank credit card will report the account as “settled” or “charged off” on your credit report. This can stay on your credit report for up to seven years after the settled date. This reporting will dramatically affect your credit score as well as your ability to obtain new credit.
Truth: Almost all credit card companies and bank credit cards will issue a 1099 to you for the amount of debt that was forgiven.
Truth: It can take months after you enter a settlement program for the collectors to realize that your debt is in a negotiation phase. It takes months to get your account in the system and get an agreed upon settlement. Until then you can expect harassing phone calls and threating letters from debt collectors.
Have you recently faced a financial hardship (job loss, medical
issues) which is causing you to fall behind on your credit card
payments? The best thing to consider is consulting a local and reputable
bankruptcy attorney. Yes, your credit will be impacted (just the same as
it would be in settlement) but all of your debt will be addressed in the
appropriate way and regulated by the courts for your benefit.