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Is Debt Settlement a Good Idea?

Making the decision to get out of debt is always a good idea. But there are several routes you can take to get there. When it comes to debt settlement, experts agree that it’s not a good idea to choose this alternative unless you’re already unable to pay on your bills. Basically, it should be a last resort.

But what is debt settlement? And is it a good idea?

A debt settlement company negotiates with your credit lenders on your behalf to lower the amount you would pay in full, thus forgiving a portion of your loan and reducing your debt. The problem? You’ll first be advised to stop paying on your cards for an undetermined amount of time. Once your credit lenders are worried enough that you’re not going to pay back the amount you owe, they may enter negotiations to reduce your payment—a process that can take a while.

In the meantime, penalties and interest accrue, and your credit score will most likely take a huge hit—as much as 125 points—that will stay on your credit history for seven years. There’s also no guarantee that your credit lenders will agree to a settlement; some credit lenders won’t even enter negotiations with debt settlement companies. Lenders who don’t agree to settle can decide to send you to a collections agency or even sue.

Even when lenders do agree to settle, debt settlement companies will take a percentage of the settlement amount, up to 20% to 25%—making it a costly way to reduce debt. Keep in mind that the IRS views forgiven debt as taxable income, so you might be paying more come tax season.

The alternative: Debt Management Programs

You don’t have to risk it all to pay off your debt. If you’re in over your head and considering settlement, talk to a credit counselor first. They may suggest you try a debt management program, which is designed so that you can pay off your debt in three to five years. Your credit counselor will work with your creditors to reduce your interest rate, so that you can begin paying off your debt in one affordable monthly payment.

Just like get-rich schemes don’t really work, eliminating your debt in one fell swoop comes with no guarantees and many pitfalls. A debt management program is a quick and efficient way to pay off debt, begin rebuilding your credit score, and reduce your financial burden.