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Popular Courses. Part Of. Understanding Debt. How Debt Affects Your Credit. How to Get Out of Debt. Debt Management Resources. Table of Contents Expand. The Basics of Debt Settlement. The Downsides of Debt Settlement. Should You Do It Yourself? Appearances Matter. The Negotiating Process. The Bottom Line. Key Takeaways Debt settlement is an agreement between a lender and a borrower to pay back a portion of a loan balance, while the remainder of the debt is forgiven.
You may need a significant amount of cash at one time to settle your debt. Consultations are free and can help you avoid the lengthy process, and stress, of trying to make calls on your own if they are not likely to be successful.
Sign up for our newsletter to get the latest articles, financial tips, giveaways and advice delivered right to your inbox. Privacy Policy. Table of Contents. Marie Scarborough St. Email Phone Any. Please select a time Anytime 9amam 11am-2pm 2pm-4pm 4pm-6pm. Sounds like the answer to your problems, right? The Federal Trade Commission FTC , the nation's consumer protection agency, says slow down, and consider how you can get out of the red without spending a whole lot of green.
The settlement is another word for a lump sum that's less than the full amount you owe. To make that lump sum payment, the program asks that you set aside a specific amount of money every month in savings. Debt settlement companies usually ask that you transfer this amount every month into an escrow-like account to accumulate enough savings to pay off a settlement that is reached eventually.
Further, these programs often encourage or instruct their clients to stop making any monthly payments to their creditors. Although a debt settlement company may be able to settle one or more of your debts, consider the risks associated with these programs before you sign up:. These programs often require that you deposit money in a special savings account for 36 months or more before all your debts will be settled.
Many people have trouble making these payments long enough to get all or even some of their debts settled. They drop out the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program. Your creditors have no obligation to agree to negotiate a settlement of the amount you owe.
So there is a chance that your debt settlement company will not be able to settle some of your debts — even if you set aside the monthly amounts the program requires. Debt settlement companies also often try to negotiate smaller debts first, leaving interest and fees on large debts to grow. Because debt settlement programs often ask — or encourage — you to stop sending payments directly to your creditors, they may have a negative impact on your credit report and other consequences. For example, your debts may continue to accrue late fees and penalties that can put you further in the hole.
You also may get calls from your creditors or debt collectors requesting repayment. You could even be sued for repayment. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Before you enroll in a debt settlement program, do your homework. Check out the company with your state Attorney General and local consumer protection agency.
Ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is. Enter the name of the company name with the word "complaints" into a search engine.
If you do business with a debt settlement company, you may have to put money in a dedicated bank account, which will be administered by an independent third party. The funds are yours and you are entitled to the interest that accrues. The account administrator may charge you a reasonable fee for account maintenance, and is responsible for transferring funds from your account to pay your creditors and the debt settlement company when settlements occur.
A company can charge you only a portion of its full fee for each debt it settles. For example, say you owe money to five creditors. The company successfully negotiates a settlement with one of your creditors. The company can charge you only a portion of its full fee at this time because it still needs to successfully negotiate with four other creditors. Each time the debt settlement company successfully settles a debt with one of your creditors, the company can charge you another portion of its full fee.
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