Many people start researching a debt settlement program thinking it will be the way to settle their debts for pennies on the dollar and once they have gone through the service, they will be starting out again with a clean slate. The advertisements of debt settlement companies helps perpetuate this idea and while they do not claim there are no downsides to participating in a debt settlement program, they certainly don't make mention of how debt settlement will affect the relationships with your creditors and the damage it will do to your credit score.
Debt settlement works by making your creditors believe that there is a chance you will never repay your loans. This is accomplished by stopping payments to your creditors. Then, as your overdue payments start to build up, your creditors start to fear they will not get any money out of you and be more open to negotiating a partial payment. Through this negotiation, you may be able to talk your creditors into accepting much less than you actually owe.
Debt settlement companies manage this process for you. When signing up for a debt settlement company, you agree to stop paying your bills and instead send monthly payments to the debt settlement provider. After "aging" your accounts, the debt settlement company will start the negotiation process and when they have been successful in reducing the amount you owe, they make your payments using money from the monthly payments you have been sending them since getting started with the service. Debt settlement is typically a time-intensive process, and one in which nothing is guaranteed, but there are many who have experienced excellent results from using debt settlement companies.
But, as alluded to before, there are serious negative side-effects to using even the best debt settlement companies that are primarily related to the aging of your accounts. During the time where you are not making payments, your creditors will be hitting your credit reports with late payments, collections, charge offs, etc. that will result in you having a bad credit rating. Even after you lower the amounts you owe and pay off your debts, your credit rating will be so poor that you will face an uphill battle getting approved for loans and credit cards. Your low credit rating could even prevent you from getting hired for certain jobs.
It is the devastating effect that working with a debt settlement company can have on your credit rating that makes debt settlement a last resort, only to be pursued when having to file bankruptcy is a serious possibility. Typically, at this point, your credit rating is already crashing so inflicting more damage is of little concern when compared to what having to declare bankruptcy will do to your financial future and overall quality of life.
Good debt settlement companies offer a valuable service that has helped many people gain control of their finances and reverse the downward slide into bankruptcy. If your finances have gotten out of hand and you have already done everything you can to reign them in, then debt settlement may be a good option for you.
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If debt settlement may be a good option for you, TheTopTens provides a list of the best debt settlement services to help you get started. If you have already settled your debts, then the list of best credit repair services may be more helpful.
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