If you have ever come across offers for debt settlement, you are probably very curious about these offers and would like to know if their promises will actually work. You might even be considering signing up for one at this very moment. Well, before you do anything, first read up on how debt settlement plan works so that you'll know the risks you are getting into and if it is worth the rewards.
Debt settlement companies are becoming more and more common nowadays. Taking advantage of the panicked feeling of many American consumers faced with enormous debts and no way out, debt settlement companies are becoming major players in the credit industry.
Debt settlement companies primarily rely on two things, the desperation of both debtors and creditors. Debtors are obviously desperate to get out of debt as quickly as possible. Creditors are also desperate because many debtors are defaulting on their debts and write offs are on the rise. Write offs are written as losses in the books of creditors, something they want to avoid so badly that they will negotiate for payments 50% or lesser than the original debt owed to them.
When you sign up for a debt settlement deal, you might be surprised by the fact that the first thing that they will tell you to do is to stop paying your bills. You are instead told to deposit your monthly payments to an account maintained by the debt settlement company. Also, the debt settlement company will ask you for a sizable upfront payment as well. They will also get a percentage of your debt as payment for their services later on.
When you stop paying your bills, you will get late fees, an increase in your interest rate and penalties, depending on your credit card. At this stage, there is no agreement between your debt settlement company and your creditor yet. When the credit company finds out that you are not paying your bills, they will now have the option to bring a lawsuit against you which will endanger your properties, if you have any or wages, if you are employed.
As you continue not paying your debts, your debt settlement company will then try to negotiate with your creditor to accept a payment of a lesser amount than the original debt to have your debts forgiven. Most companies aim for 35% of the original debt. If the creditor agrees to the settlement, then your debt is forgiven. However, your credit report will be marked with “settled for less than full amount” which will have a large negative impact on it.
As attractive as debt settlement offers are, there are clearly very serious risks involved. While you may have your debt forgiven for a percentage of its original amount, you will end up ruining your credit report. If you are employed or you own your home, you might be putting these in jeopardy as well. So think hard and consider all consequences before making the jump to a debt settlement program.