The financial burden of debt is a feeling that millions of people in the U.S. face every day. After a while, the struggle to pay it back can become so stressful many will need help to get out from under it. When it comes to eliminating debt, there are several options. At its core, debt settlement sounds like a good idea. Who doesn’t want to pay off their debt in one lump sum lower than the amount they spent? It sounds like a great deal.
For most people, however, it’s not. In fact, the NFCC found in a recent study that consumers only settle 45% of their debt by the third year of the settlement process. Meaning the process can be very long.
How does it work?
Creditors l won’t negotiate with a debt settlement company unless it looks like you can no longer pay your debt back. During the undetermined amount of time that you don’t pay your bills, you will be subject to penalties, accruing interest, and creditors trying to collect. Even worse, your credit score will take a hit that can be as high as 125 points. Payment history is weighed heavily on credit score models and negative marks take seven years to disappear from your credit history—meaning that building back your credit score to anything resembling healthy is going to take some time and a complete overhaul on your spending habits. In the meantime, you will most likely find it harder to get approved for loans, credit cards, mortgages, and rental agreements.
Once a debt settlement company enters negotiation, there’s no guarantee that your creditors will agree to settle, and some credit card companies refuse to work with debt settlement companies altogether. If they decline to negotiate, they may opt to turn you over to a collections agency or sue you. Even when lenders agree to settle, debt settlement companies will charge as much as 25% of your savings. Sound pricy? You’ll also want to keep in mind that the IRS views forgiven debt as taxable income.
What can you do instead?
While debt settlement may seem like a windfall, it can cause even more financial issues. The best place to begin if you’ve decided enough is enough, is to contact a credit counselor who can enroll you in a debt management program. Credit counselors will work with your creditors to consolidate your unsecured debt into one affordable monthly payment designed to be paid in three to five years, while also lowering your interest rate.
Experts agree that while debt settlement may be better than declaring bankruptcy, it should be a last resort. By choosing an alternative like a debt management program, you’ll be able to pay off your debt quickly without taking huge hits to your credit score—meaning you’ll take back your life and your financial health sooner and with fewer issues along the way.