What Are the Pros and Cons of Debt Settlement Companies

If your credit cards are maxed out, your sources for loans have dried up, and your credit score has bit the dust, you are drowning in debt. If you are drowning in debt you may be considering settling your debts. Dealing with debts of this magnitude can be overwhelming, which is why it is easy to fall for a pitch from a debt settlement company. Debt settlement companies often pitch ads that claim to be able to settle debts for pennies on the dollar, or even to erase entire debts from your credit report. Such an offer is mighty tempting to someone drowning in debt. Sometimes the debt load we face is so high, we have trouble seeing past it, and seeing with reason. I call this phenomenon debt blindness, where all we see is the debt, and reason takes the backseat.

Debt Settlement Companies offer consumers the opportunity to settle their debts for less than what is owed to the creditors. On paper it sounds great, like a dream come true. Rack up a massive debt load then contact one of these companies and pay only pennies on the dollar for your past due debts. These companies are typically for profit ventures. How they work is you set up an escrow like account with one of these firms, where a set amount of money per month is transferred into. This money will collect in your escrow account until such a time as there is enough money to pay off a settlement with one or more of your creditors.

The danger these companies pose are varied and many. Many of these companies for example tell their clients to stop making any payments whatsoever to their creditors. This has a huge negative impact on your credit report that is in fact just as bad as a bankruptcy would be, since your record of non payment will sit on your credit reports for a period of 7 years. Your credit scores will tank to abysmal levels. Late fees and penalties will continue to rack up on your debts during this time, which in effect is pushing your further down the proverbial rabbit hole.

Meanwhile you are making payments to the escrow-like account in the eventual hopes to pay off these debts, yet there in lies the next problem, many consumers end up not being able to stick to this plan, and end up dropping out of the program. Even though you would have dropped out of the program, the debt settlement company still is entitled to their fees and charges for services rendered up to the date you dropped out of the program, if even just one debt was settled. To ensure they get their fees they will often settle any small balance debt they can. If you do opt for such a program, you need to be certain that you can commit to it for the duration.

The next problem that often occurs is that your creditors are under no obligation to offer any sort of settlement. In fact many creditors see these companies as vultures and will refuse to work with them. If this happens you have pretty much destroyed your credit for no real gain, since no settlement will have been offered. Even if a settlement has been offered, this does not mean your credit rating is restored, since you will still have your late and missed payments damaging your credit score for a period of 7 years.

During the time period that you are not paying your creditors you are at high risk of lawsuits and judgements from your creditors. This is especially true for very high balance debts. If any of these creditors win their lawsuits on you, they could have your wages garnished. Creditors can also opt for a lien on any property you own, and once a judgement has been filed you will not receive any sort of settlement offer.

If you do opt to use a debt settlement company please so make an educated decision. I should also point out that you yourself can do the same service they are offering yourself and for free. It is not rocket science to pick up the phone, call your creditors and make a settlement offer, after stating your case of financial hardship.

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