What can they do for you that you can’t do for yourself? 

They claim: They will contact your creditors and demand that they cease contacting you.

Whole truth: If you choose to exercise it, it is your right under the Fair Debt Collection Practices Act (FDCPA) to contact your creditors in writing and ask that they cease contact with you. If they don’t stop, they can be held liable in court, according to the Federal Trade Commission. You can do this yourself for free. Send the letter certified, return receipt requested and then you will have proof that it was received. If they continue to contact you, they can be sued for damages.

They claim: Their professional negotiators will contact your creditors, negotiate settlements for you and you will only have to pay back about half of what you owe.

Whole Truth: It is true that a professional negotiator may be able to use tactics they have learned to reduce your debt. They may even be able to do a better job than you can, just simply because they know what to say. However, you can negotiate settlements on your own. It is true that many credit card companies may not negotiate with you if your debt is current. They will be more willing to negotiate a settlement if they feel the debt may not be repaid at all. Therefore, they may be more willing to offer a settlement if the debt is several months past due. Let me clarify that I do not recommend that you stop paying your bills for a few months. This will further damage your credit and cost even more money in interest and fees. I’m just giving you the facts.

They claim: Debt settlement can help you improve your credit by decreasing your debt-to-income ratio.

Whole Truth: While it could theoretically help the portion of your credit score that deals with debt-to-income ratios, it will damage your credit in many other ways. First, your payments will fall further behind because your payments will be held by the settlement company in an account until the full settlement amount is received. Which will result in more late marks and possible charge offs on your credit report. Debt settlement will be reported on your credit report by most creditors as “Settled for less than full amount”. This is negative because creditors see that you were not able to repay the entire amount. It may be better than bankruptcy or not paying the debt at all because you are at least paying some of the debt but it can seriously damage your credit.

They claim: It’s better than a debt repayment plan through a credit counseling agency.

Whole truth: It depends on what you’d like to accomplish. If you don’t care about your credit rating and just want to get out of debt as cheaply as possible, debt settlement may be for you. If you’d like to emerge from debt with your credit in decent shape, debt settlement is not better for your credit than a debt repayment plan through a credit counseling agency. First, you will repay all of what you owe at reduced interest rates through a counseling agency, therefore you can reestablish a consistent payment history. Second, you are repaying your debts so creditors will see this as a responsible step in the right direction.

How much do you charge?

	They claim: They will save you 50% of your debt and get you out of debt in three years or less, compared to 30 years without their help, and charge a reasonable fee.
	Whole truth: They may be able to negotiate a settlement for 50% of what you owe. However, their fees may be 25% of what they save you. It's up to you to decide what is a reasonable fee. For example, if you owe $10,000.00, they may be able to negotiate a settlement of $5,000.00. Essentially, you would save $5,000.00. Their fee in this case would be $1,250.00 for this account, which would have you paying them $6,250.00 ($5,000.00 would be sent to the creditor and $1,250.00 would be kept for their fee) for that debt. Therefore, you are technically paying 65% of what you owe, which you may be able to negotiate for yourself directly with the creditor.
	It is true that it can take 30 years to repay credit cards if you only pay the minimum amount due every month. However, deciding to pay a set amount each month toward your credit cards and consistently sticking with this plan will usually get you out of debt in about 5 years. If you are able to lower your interest rates through direct negotiation or a credit counseling agency, this timeframe can usually be reduced to 4 years or less. You’ll be able to emerge from debt with your credit intact.

Here’s the bottom line: If you are interested in preserving your credit, the best option is to work out a plan to repay your creditors on your own. If you need help lowering interest rates and payments, a debt management plan through a respectable credit counseling agency is a good choice. Be sure that you make your payments on-time every month and double-check everything that the agency does. It’s your credit on the line so make sure you know exactly who is getting paid and when. 

Be actively involved in everything that is going on with your repayment plan. Even reputable agencies sometimes make honest mistakes so it’s your responsibility to stay involved. If you just want to get all debt paid off and aren’t as concerned about your credit rating, debt settlement is one way to accomplish this. Be aware that anything you do will stay on your credit for 7-10 years. 

I’d suggest that you try to negotiate these settlements on your own first. Get any creditor promises in writing. Try to negotiate the way they report to the credit bureau. Some creditors (especially collection agencies) may agree just to report the debt as “paid” instead of as a settlement. 

When you find yourself in debt, it may seem like a good idea to solve the problem as quickly as possible but weigh the consequences before you make a move that you may later regret. 

*  *  *

Copyright © 2003 by Jennifer Delcamp

Want more money-saving tips?  Get a FREE subscription to our monthly Ezine!