Many times, you face a financial situation when you have to pay off a high amount of debt every month. It not only puts pressure on your monthly income but also your mental health. In such a situation, it is better to turn to a debt settlement company with the hope that your total debt will be reduced.

The service of debt settlement is offered by different third-party companies who try to settle the overall debt by negotiating a settlement with the debt collectors or your creditors. Some companies are quite successful in doing so, but there are certain risks associated too that may prove dangerous later on. Debt settlement may affect your credit score badly.

Knowing about the basics of debt settlement programs and its pros and cons will help you working with the best and ensure that your credit score is not affected.

How does debt settlement work?

Also known as the debt relief or the dent adjusting companies, these debt settlement company contacts your creditors on your behalf. They negotiate with your creditor with a better payment plan or try to reduce or settle the debt. You have to pay them a charge over the amount that you have saved.

The process of debt settlement mainly starts with negotiation from the debt settlement company with your creditors. They try to settle the account for a lump-sum payment that is often less than the amount that you owe. During the process of negotiation, you may have to deposit payment after a fixed interval into an account. This amount will be later paid as a lump sum to your creditor. The debt settlement company administers the account. Different companies offer such services, and can help you learn better.

After your creditors come into an agreement with your debt settlement company and you agree to that agreement you have to make the payment. Once you make at least one payment to your creditors towards settling your debt, the debt settlement company will charge you their fees. This may be decided earlier at a percentage of the amount saved or any fixed amount.

Pros of Debt settlement

When you settle your debt through a debt settlement company, you can do the following:

  • Lower your overall debt amount
  • Avoid bankruptcy due to excessive debt
  • Get your creditors paid and get relief from them.

What are the points you need to consider?

  • If your creditors do not agree to negotiate

When you contact a debt settlement company, you hope that they will settle your debt with your creditors but what if the creditors do not agree to negotiate? Many creditors do not want to discuss matters with debt settlement companies.

  • If you end up with more debt

When the negotiation is on with the creditors, the debt settlement company normally suggests you stop any kind of payment. Now, if you stop making payments, then you will end up accumulating late fines and charges. Sometimes if there is too much delay, then there are chances that there will be some lawsuit or you face collection efforts? All this may accumulate to a higher amount, and it’s only you who have to bear all this.

  • You may be charged even if the whole debt is not settled

There is a rule that the debt settlement company will not charge you until and unless you pay at least one payment towards your debt settlement. Still, there may be six or seven creditors, and you have settled with one or two of them. Naturally, you have to pay off the debt settlement company of their charges, although there are still a lot of accounts to be settled.

  • It may impact your credit negatively

When you stop making payments to your creditors as the company will be negotiating, you may be hampering your credit score. When you are not paying off the creditors on time, they will notify it to the credit reports, and it may get hampered.

Is it good to settle debts then?

After undergoing the pros and cons, you now may be in a dilemma whether you must work with a debt settlement company or not. Actually, there are hundreds of examples that have turned out successful but there are few that were unsuccessful, and you may not like to take the risk. Thus, you may have to take the chance, but you can try something that will help you before you hand over the job to the debt settlement company.

  • If you know your current financial situation, then you can try to negotiate with your creditors all by yourself. You never know it may work and you get relief of the credit.
  • If you have balances on credit card, then you can think of balance transfer. That means you will be transferring the balance of your credit card on which you are paying interest to a new card. You may have to bear a balance transfer charge. Now, calculate which will be higher, the interest that you pay or the balance transfer charge. Act accordingly.

To wrap up

If you want your debts to be settled, then you have to think of some idea. Being financially strong will not bring you to such a situation but when you do not financially string it is obvious you have to look for other options. If you are not sure of your negotiating skills, then the debt settlement companies are the best way to settle your debt. Thus, if you think of working with any such company, then it is better that do research about the companies work procedure and read reviews about them. This way you can learn about whether it is possible to work with them and then let them handle your debts.

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Author Bio

Kelly Wilson is an experienced and skilled Business Consultant and Financial adviser in the USA.  She helps clients both personal and professional in long-term wealth building plans. During her spare time, she loves to write on Business, Finance, Marketing, Social Media. She loves to share her knowledge and Experts tips with her readers.