Paying back on credit card loans can seem like a neverending process, so a debt settlement company can look like a way to speed things up. While debt settlement can offer advantages, such as cutting what you owe by up to 50%, it’s generally considered a last-resort option.
Understanding the potential benefits and drawbacks can help you decide if it’s the right approach for your situation.
How Debt Settlement Can Help
- Reduce your repayment: With debt settlement, you may be able to pay off your debt in one lump sum for as much as half of what you originally owed.
- Last resort: While experts urge caution when considering debt settlement, it’s often viewed as a less-drastic alternative to bankruptcy.
- Reduced creditor contact: For many people, debt settlement can bring a pause to the constant outreach from creditors.
- Shortened payoff timeline: By lowering the amount owed, debt settlement can sometimes help borrowers resolve their debt sooner.
How Debt Settlement Can Hurt
- Credit damage considerations: Debt settlement companies usually advise stopping payments on your credit cards, so credit card companies are more likely to enter into negotiations. But this will ultimately lead to penalty fees, accumulating interest, and a negative impact on your credit score.
- Expensive fees: With fees reaching 15%–20% of the settlement, the cost of debt settlement may outweigh the benefits for some people.
- Unreliable: Credit card companies are not required to negotiate, and even if they do, they won’t necessarily settle. They may even send your case to collections or sue, which could result in wage garnishment.
- Long-term credit effect: Debt settled through a debt settlement company can remain on your credit report for seven years, marked as “settled” rather than “paid in full.” This can impact your ability to take out loans and result in high-interest rates.
How a Debt Management Plan Can Help
A less-risky alternative to debt settlement is a debt management plan. This is a program you enroll in through a nonprofit, certified credit counseling agency. You’ll work with a counselor who negotiates with your lenders to reduce interest rates and consolidate your loans into a single monthly payment, helping you take control and pay down your debt more efficiently.