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The Dangers of Debt Settlement

Debt settlement companies often advertise fast solutions for overwhelming debt, but many consumers experience damaged credit, increased costs and little relief.
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What is debt settlement?

Debt settlement involves a company claiming it can negotiate with creditors on your behalf to reduce the amount you owe. While appealing in theory, this approach often carries serious risks.

Credit card companies do not have special relationships or affiliations with debt settlement companies. In fact, some credit card issuers refuse to work with debt settlement companies. Despite the promises made by debt settlement companies, you will not receive a better deal by working through them.

Common outcomes include:

  • Ending with more debt than when you started
  • No debts successfully settled
  • Credit scores below 600 (considered subprime)
  • Increased risk of lawsuits from creditors

How debt settlement companies operate

  • Instruct consumers to STOP paying creditors
  • Instruct consumers to START putting money into a special account for future settlements
  • Wait for consumers to default on their debts, making it easier to settle
  • Once in default, settle with creditors for typically 50% of what’s owed
  • Collect a large fee for every completed settlement, sometimes up to 25% of your pre-settlement debt

Debt settlement red flags

  • Pressure to sign a contract quickly
  • Pressure to stop talking directly to creditors
  • Claims of special relationships with creditors

Safer alternatives to debt settlement

  • Negotiate directly with creditors. Contacting your lender improves your chances of avoiding a new collection, damaging your credit report, and facing a potential lawsuit. Typically, credit card issuers will only discuss settlements if you agree to close your card.
  • Work with a nonprofit credit counseling agency
  • Develop a repayment plan with a certified counselor

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