As more and more Americans are finding themselves in over their heads in debt, more and more are turning to debt settlement companies to help them pay off their debt. But, many people are confused about what debt settlement companies do. This debt settlement company guide will help you to understand the service provided by debt settlement companies, how much they charge and whether you should hire debt settlement company to reduce debt.
What is a Debt Settlement Company?
Debt settlement companies negotiate with creditors on your behalf to get the creditor to agree to settle your debt for less than the amount you owe. Therefore, in simplest terms they are negotiators.
When you first engage a debt settlement company, you will be instructed to stop paying you creditors. Creditors will not typically negotiate write downs of debt if you are current in making payments. But, once you stop paying them, the realities of non-payment become obvious.
But, when you stop paying your creditors, you will typically have to pay these payments to the debt settlement company. These payments are not kept by the company, but instead it builds up a payment pool to payoff creditors when they do agree to settle a debt.
How Much Should I Pay A Debt Settlement Company?
There are two typical fee models charged by debt settlement companies and you need to stay away from the one. Let me start by describing the acceptable model.
A good debt settlement company will charge a percentage of the amount of debt reduction that they are able to negotiate. A typical percentage could be up to 15%.
Stay clear of a fee structure based upon the total amount your debt. In this model, a debt settlement company's fee is calculated based upon the aggregate amount of debt that you come to them with. As you can see, the fee calculated using this model could be much greater than if the fee is based upon the amount of money they save you.
Another problem with the second fee structure is that the fee structure does not incentivize the debt settlement company to get you a larger reduction of debt. You want your debt settlement company to be motivated to get you the best debt settlement they can.
Does a Debt Settlement Hurt My Credit?
Absolutely. So many people don't truly understand what the credit score is all about. Your credit score reduces to a number the likelihood that you will pay your debts in full. A debt settlement is not a payment of debt in full. You are negotiating with your creditors to pay less than you OWE. Even though they agree to the settlement, the fact is you are not paying them back what they are owed. Therefore you credit score should go down and it will.
Another thing that hurts your credit is the fact that you will stop paying you bills when you first hire the debt settlement company. This will really knock down your credit score.
BUT STOP WORRYING ABOUT YOUR CREDIT SCORE!!
What? Credit is what got you into this problem in the first place. If you are in need of a debt settlement company, you should not be getting more credit. So, don't worry about it.
After you debt settlement is done. Start the slow process of rebuilding your credit. Start by paying your bills back on time.
Are Debt Settlements Worth It?
Yes and no. First of all, you can do all of the negotiation yourself. With a little research, you can save yourself the debt settlement fee and do it yourself.
However, if you are not comfortable with doing it yourself, then debt settlement companies can be a great way to get help.
Individual bankruptcies are harder to get now than they have been in the past. Therefore, some people need to negotiate write offs of their debts as opposed to filing for bankruptcy.
If you find yourself in this situation, then find a good, reputable debt settlement company to help you to get out of debt. The resources below are some great places to start looking for a good debt settlement company.
Great Resources To Research Debt Settlement Companies
The Associate of Settlement Companies - TASC is dedicated to promoting good practices within the debt settlement industry. Go to the TASC site and search for debt settlement companies that are members of TASC.
Better Business Bureau - As always, the Better Business Bureau is a great resource to check out the reputation of debt settlement companies.
Google - Do a search in google for "debt settlement company reviews" or "debt settlement company complaints" or "[your debt settlement company's name] review" or "[your debt settlement company's name] complaint."
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The best way to take to take care of paying for your debts is to start spending less and paying more on your debt. There is no magic solution or company that will help you do that. If you hire a debt collection company, you are paying more fees which will slow down how quickly you can get out of debt. Sometimes we make it to complicated. Simply cut your expenses, increase your income (second job) and pay more on the debt. Eventually you will have freedom!
@BibleDebt – Thank you very much for leaving a comment. For most people I 100% agree with your comment. However, there are situations which arise in life that make paying off debt almost impossible.
While I am not a have of not paying back debts that you owe, sometimes, it is the decision that has to be made. Society has acknowledged this in its bankruptcy laws and consumer protection laws.
Wow nice write up! Hope I’ll never need it, but I unfortunately know a few people who might…
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I hope that you never need it too!!