When it comes to paying off debt, you have a number of options. Of course, it’s human nature to want to find the fastest and easiest way to that end. While debt settlement companies may seem like a great idea, with the promise of reducing what you owe significantly and an end to collection call harassment, there are many factors to consider—and many experts agree that debt settlement should be a last resort before bankruptcy.
But there are potential benefits, so knowing the pros and cons of debt settlement can help you make the right decisions for you.
Pros of Debt Settlement
- Lowering your debt: Debt settlement aims to decrease the total amount you owe, sometimes by as much as 50%.
- Put a stop to harassment: Constant calls and letters from creditors can be exhausting and embarrassing. When you start working with a debt settlement company, collection outreach should end.
- Final alternative: While debt settlement has drawbacks, it’s often a preferable alternative to bankruptcy, helping you avoid the severe impact bankruptcy can have on your credit score and financial history.
- Speed up your repayment timeline: When successful, debt settlement can allow you to pay off your debt more quickly than making only minimum monthly payments.
Cons of Debt Settlement
- Credit score impact: When you start working with a debt settlement company, they usually advise you to stop paying on your credit cards altogether. This puts pressure on the lender to enter negotiations. The downfall? During this time, you’ll still rack up penalties, interest, and hurt your credit score.
- Expensive: Debt settlement companies are known for charging high fees, often 15%–20% of your settled debt
- Uncertain outcomes: Lenders aren’t required to negotiate, and some may refuse entirely. Meanwhile, penalties and fees continue to accumulate, which could leave you owing more than when you started.
- Credit history impact: Debt settled through a debt settlement company can remain on your credit report for up to seven years, which may affect your ability to qualify for future loans.
Try a Debt Management Plan
If you’re looking for professional help but don’t want the negative impact of working with a debt settlement company, try making an appointment for credit counseling. Nonprofit credit counseling organizations offer free credit counseling. They can also set you up with a debt management plan (DMP), where your counselor negotiates with lenders to lower interest rates and combine your loans into a single, affordable monthly payment. DMPs are designed to help you repay your debt efficiently over three to five years, boosting your credit score and putting you back in good standing.