Debt Settlement: The Right Solution? |
By Siddarth Nagaraj on February 17, 2011
.jpg.aspx?width=75&height=75) Debt settlement: the term itself sounds vaguely appealing. It seems to mildly suggest the full resolution of problems surrounding one’s credit status and immunity from any form of complaint. There exists a large number of purported “solutions” claiming to offer a cure for debt-linked dilemmas. In exchange for a small fee, the advertised claim goes, the company will negotiate terms will eliminate your debt while paying as little as half of what you owe your creditors. If this seems too good to be true, it’s because it is; there are limitations to the benefits of debt settlement. Yet debt settlement companies are perfectly legal firms which conduct legitimate business and their services can be of actual help to you if employed under close observation and with constant involvement.
Debt settlement involves your repayment of a certain percentage of your current outstanding debt (usually 20 to 75%) in exchange for your creditors’ forgiveness of the remaining amount and reporting the settlement to the three credit bureaus (Equifax, Experian and TransUnion) which write your report and determine your credit score. The willingness of creditors to partake in debt settlement originates from their acceptance that some debtors in all likelihood will never be able to repay their debts in full.
Understandably, creditors have made sure that debt settlement is not widely advertised. Additionally, they have also made it difficult for debtors to use the option for their benefit. Debt settlement cannot be pursued unless you are at least three to six months behind on your payments. As if that were not enough, many creditors have varying individual criteria in order to qualify for debt settlement. It would appear then that hiring a debt settlement company to act as a negotiator on your behalf might be useful when contending with multiple creditors.
This is not necessarily the case. Debt settlement companies often charge high service fees in a very shrewd manner so that it is difficult to estimate a precise figure for the industry as a whole. While some agencies claim 15 to 18% of your total debt as their fee, others may demand as much as 25% of debt savings as their commission. The exorbitant cost of such fees may mean that you do not actually save money through the debt settlement for several years afterwards as you try to make payments to the company which negotiated the agreement for you.
Working with a good attorney or credit counselor can be a positive alternative to hiring the services of a debt settlement agency. While counselors can provide you with advice on how to rebuild your credit and attorneys act as your representative, debt settlement companies are not obliged to do either. In fact, employing them may sometimes be a liability, since some creditors will respond to the intervention of debt settlement companies by reporting the account to a collection agency (a process known as escalation). You are then faced with a court case and left with a debt settlement company that doesn’t have the right to represent or advise you.
Debt settlement seems on the surface to be a highly palatable choice among the various manners of addressing debt-related issues. In fact, it is a very risky option with high dropout rates and costs that are disproportionate to the benefits provided by the services that its clients pay for. |
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