Common Debt Settlement Concerns

By Christina Austin

If you have a large amount of debt piled up, you have most likely been contacted by creditors or collections agencies asking you to repay them. These calls and communications can get stressful over time. You may also be getting sued over an unpaid bill. If you find yourself in this situation, you may also be targeted with advertisements for  debt settlement services. Not to be confused with debt consolidation, debt settlement focuses on renegotiating the amount of money owed. Debt consolidation, on the other hand, focuses on shifting who the money is owed to. If the amount you owe is larger than you could possibly ever pay back, settlement may be your best option. If you decide to go the settlement route, here are a few points to keep in mind.

Will debt settlement hurt my credit score?

Yes, debt settlement will hurt your credit score. Your credit score is likely already affected by your payment delinquency, and fixing your debts by settling them will further hurt it. While terms of your repayment are being discussed, you may be encouraged to stop paying collections agencies and others asking for their money altogether. This could build up late fees and interest on top of what you already owe.

A debt settlement plan modifies or negates your original credit agreement. When the lender closes the account due to a modification to the original contract, your credit score diminishes

You should negotiate with your creditor before they fully close your account to have the account reported as “paid in full” (even if that’s not the case). This does not hurt your credit score as much.

How long does debt settlement take?

In general, a traditional debt settlement program takes about a year and a half to 4 years, depending on your circumstances. Different factors, like the amount of debt, who the money is owed to, and how much you can afford to pay back at a time, will affect the length of time it takes for your debt to be settled. If you fail to abide by the terms of your settlement agreement, you may be sued by your creditors.

Can you really save the amounts you see on TV commercials?

Be wary of what you see about debt settlement on TV commercials. They are, after all, trying to sell you a service and will make generalized claims to encourage you to call them. Debt settlement is a very personal matter, and each settlement program is different. Depending on your amount of debt, how long your bills have been delinquent, and who your creditors are, your settlement terms will look very different from a neighbor’s. So while the commercial may tout a real settlement agreement, it may not be what you qualify for. As with any debt pay-off program, do your research to make sure you are getting the best deal for your situation.

Are there fees associated with debt settlement?

If you work with a debt settlement agency, you will be expected to pay a fee. If you go through the same debt settlement process on your own, you will avoid the fee, but also need to do more of the work yourself. When you work with an agency, you generally pay them a lump sum every month which is put into an account in your name, instead of paying your creditors. The agency then negotiates settlements for you and pays the settlements out of that account they set up for you. For their negotiation service, you will pay them a fee. Make sure that once you add up all the anticipated fees and the interest you will accumulate, that your advisor is still worth it and merits working with them as opposed to going through the same process independently. Many people have successfully done that.

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