Under a debt settlement arrangement, your creditor would agree to accept a lump sum payment of less than your account’s balance in order to resolve your debt completely. In case, you have a bundle of cash, the debt settlement would be a legitimate option for taking care of high-interest and unsecured debts. However, do not hire anyone or any company to settle your debts. You could effectively settle debts independently. Fee of the debt settlement company has been high and generally non-refundable. In case, a settlement company could persuade one of your creditors to take less than the total balance to resolve a debt, then so could you.
What debt settlement companies would do?
A debt settlement company claims it would, for a reasonable fee, convince your creditors to take as little as half of what you owe to resolve your debt issues. It sound great and it has been a great program. As you probably do not have a bunch of cash lying around, you would be required to pay the debt settlement company a sequence of monthly payments. Foremost, know that generally your payments would go totally towards the fee of the settlement company until the fee has been paid in full. Only after the fee has been paid in full, you would start building a settlement fund. When you have built up enough in your debt settlement account, the company would try to settle one of your debts.
What is the catch here?
Your creditors would have agreed to do nothing. However, during the several months you have been making payments to the debt settlement company, the creditors you have been told would settle have started aggressive collection activity. You would get phone calls, letters and worse. Moreover, you could be sued and face embarrassment while the debt settlement company would be holding your money. Telling creditors that you have signed up for a settlement plan along with making monthly payments would have no influence whatsoever on your creditors. They would not care. However, to avoid embarrassment, you might be forced into bankruptcy. You could get back the money in your account from the debt settlement company, but the fee you have paid has been probably gone forever, despite the company did not offer a single debt relief for you.
What is the moral here?
The moral has been never to consider signing up with a debt settlement company unless you get a document from each creditor involved. The settlement should be documented on the creditor’s letterhead. It should state that the creditor would accept a particular dollar amount on a specific date in the future that would completely resolve your debt. In the meantime, the creditor would not pursue collection of the debt from you.
In case, you do have a lump of spare cash, you should start considering doing your own settlement, along with various other options, for paying unsecured debts. However, you should keep the following things in mind. You would require an Emergency Savings fund. Do not use every spare penny you could scrape together for settling a debt that would leave yourself susceptible. It would be a poor idea to withdraw money early from a retirement account in order to pay toward debt.