Is Debt Settlement Worth It? | CCCS of Iowa
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Is Debt Settlement Worth It?

With a combined $807 billion owed across roughly 506 million credit card accounts in the U.S., it’s safe to say that many Americans are suffering from debt. If creditors are calling and you find yourself drowning in debt, it’s time to figure out how you’re going to rebuild your financial health. For all their claims to help people pay off debt for less than they owe, turning to a debt settlement company might seem like a good option—but is it worth it?

The short answer is, probably not. Experts agree that debt settlement should mainly be used as a last resort. It falls right above bankruptcy when you measure its long-term impact on your credit score. For people who can no longer pay on their bills, debt settlement may offer a path out, but for the majority of people looking to climb out of debt and repair their credit standing, debt settlement can do more harm than good. Here’s why.

Your credit score will take a dive. Debt settlement companies work on your behalf to negotiate with credit lenders to reduce the amount owed so that you can pay it out in one lump sum. However, lenders usually won’t negotiate until they’re sure you aren’t going to pay them back what you owe. To do this, debt settlement companies will advise you to stop paying on your credit cards while they work on the negotiations. Instead, the company will set aside the money into an account until there is enough to pay the lender. While you’re not paying your bills, you’ll be subject to penalties, accruing interest, and creditors trying to collect, and your credit score can take a major hit—as much as 125 points. Payment history is weighted heavily on credit score models and negative marks stay on your credit history for seven years, making it potentially harder to get approved for loans, credit cards, mortgages, and rental agreements.

There’s no guarantee. Credit lenders don’t have to agree to settle, and some credit companies refuse to negotiate at all with debt settlement companies. In the event you’re denied, the credit lender may then turn you over to collections agencies or sue you.

It’s not for free. Once a settlement has been negotiated, companies that offer debt settlement take as much as 25% of your savings. It’s also important to note that the IRS views forgiven debt as taxable income, so you might find yourself paying more come tax season.

Luckily, there are alternatives. Start by contacting a credit counselor and find out more about enrolling in a debt management program. Credit counselors will work with your creditors to consolidate your unsecured debt into one affordable monthly payment, while also getting your interest rate knocked down. And because debt management programs are designed so that you can pay off your loans in three to five years, you’ll be able to pay off your debt more quickly—without the downsides you’ll find with debt settlement.