The first thing that we should clarify is that debt settlement is NOT the same as debt consolidation. A lot of people are under the impression that it’s the same kind of program and that creditors willingly work with debt settlement agencies. Debt consolidation requires you to pay off all of your debt under one big loan and is only available to people with good or excellent credit. Debt settlement is quite different.

A debt settlement agency attempts to negotiate with your creditors to settle your unsecured debt (i.e. credit card debt, unpaid medical bills, store card debt) for less than what is currently owed. More specifically, in a debt settlement program you withhold payments from your creditors in order to get them to settle for a lower amount than what you owe them. That means that you will have to default on the creditors first, if you have not already done so. Additionally, there are no guarantees that your creditors will settle.

If you have not already defaulted on the debt that you are trying to settle, it is important to remember that a default will seriously damage your credit. Damaging your credit might be the right thing for you, though, if you can receive enough debt relief to get a fresh start.

How your creditors will react when you enter a debt settlement program:

Again please keep in mind that there are no assurances that your creditors will reduce your debt.

• If you are trying to settle debt that you have already defaulted on and are not making payments towards, then your creditors will continue to contact you as often as they did prior to entering the debt settlement program.
• If you start withholding payments from your creditors on debt that you have not already defaulted on, then you should expect.
  • Assessment of penalty fees.
  • A potential increase to your interest rate.
  • Multiple calls and letters from your creditors, trying to convince you to start paying again.
  • Your creditors may also file a lawsuit against you, which could lead to wage garnishments if a judgment is entered in the creditor’s favor prior to a settlement being reached with the creditor.

Therefore, it is important that you do NOT enter a debt settlement program unless you really do not have the resources to pay off your debt OR have already defaulted on the debt and the creditor has not filed a lawsuit against you.

Types of Debt:

In a debt settlement program you can only attempt to settle the following types of debt:

• Credit Card Debt
• Store Card Debt
• Unpaid Medical Bills
• Unpaid Phone Bills

Do not get convinced to include any other types of bills/loans in a debt settlement program, other than the ones mentioned above, because any other type of creditor will not be willing to settle. For example, do not include student loans, home loans, or auto loans in a debt settlement program.

Payments / Fees:

Once accepted into a debt settlement program, consumers generally make payments to both the debt settlement agency and into an independently managed savings account. The payments to the debt settlement agency covers their fees. The money from the independently managed savings account is leveraged by the debt settlement agency to negotiate with your creditors.

If debt settlement is your path, you will pay a set-up or enrollment fee, and part of your monthly payment will be a fee for the agency’s services. Usually their fees are 10-15% of the amount of debt that you are trying to settle. So for example, if you are trying to settle $10,000, the fee to the debt settlement company will be between $1,000 and $1,500. You should definitely get quotes from multiple agencies before making a final decision.

While the debt settlement program may last several years, the fees for the debt settlement agency’s services are often front-loaded and paid in full in the first 3-12 months of the program. The hope, of course, is that these fees pay for a service that negotiates your debt lower than you could on your own, and that the service takes the work and stress of debt negotiation off your hands.

No Guarantees:

Similar to an attorney representing you in a legal matter, there are no guaranteed results in a Debt Settlement program, and the fees paid for the service itself are often non-refundable. With the exception of the fees paid to the Debt Settlement company, any money paid into the independently managed savings account should remain liquid and refundable to you should you choose to withdraw from the program. You should verify that these funds are indeed refundable before depositing funds into an account as part of a debt settlement program.

Do It Yourself:

You can definitely attempt to settle with your creditors without going through a debt settlement company / agency. In most cases, debt settlement companies do NOT get any special treatment from any creditors, not even the credit card companies.

The advantages of using a debt settlement company are:

• A debt settlement company is likely to know which creditors are more inclined to settle and for how much.
• A debt settlement program will provide you with the discipline to save money every month that you can use as leverage when negotiating. Remember that no creditor will want to make a deal with you unless you are ready to make a lump-sum payment.

The disadvantages of using a debt settlement company versus negotiating on your own are:

• A debt settlement company will charge you a non-refundable fee for their service.