Debt settlement is when you negotiate with creditors to settle your debts for less than you owe. For example, if you have a credit card with a balance of $1,000, the creditor might agree to settle for $500, a discount of 50%. Debt settlement is helpful for people who are experiencing financial difficulties and can’t make their payments as agreed.
Although you can negotiate your own settlements, the process is time-consuming, so many people turn to third-party companies to do the negotiating for them. Credit card debt companies may be able to negotiate lower settlement amounts, making your financial situation more manageable. In this guide, you’ll learn more about debt settlement and find out which companies have the best reputations in the industry.
Potential Benefits of Debt Settlement
One of the primary benefits of debt settlement is that you reduce the amount you owe, leaving you with more room in your budget for food, housing and other essentials. Let’s say you have two credit cards with balances of $3,400 and $5,200, a total of $8,600. A company that helps with credit card debt may negotiate settlements of $2,500 and $4,000, reducing the amount you owe by $2,100.
Another benefit of debt settlement is that it may help you avoid bankruptcy. Although bankruptcy has helped many people, it’s not right for every borrower. It’s also a formal legal process, which means you need to file paperwork with the court and attend hearings related to your case. Debt settlement is less formal, so it doesn’t take as long to complete. There’s also no need to pay an attorney to represent you during settlement negotiations.
Potential Drawbacks of Debt Settlement
Debt settlement has several advantages, but it also has some potential drawbacks. One disadvantage is that debt settlement firms can’t guarantee that they’ll settle every one of your debts. Some credit card companies refuse to budge, leaving you owing your full balance on those accounts.
If you stop paying on your accounts, you can also expect your credit score to decrease. This is because 35% of your FICO® score is based on your payment history. Late payments and missed payments have a major impact on your score, which may make it difficult to qualify for a home loan or open another credit card. Settled accounts will also stay on your report for up to seven years. That means potential creditors can see that you settled an account instead of paying it in full.
You may even have to pay federal and/or state taxes on the amount of debt forgiven by each creditor. For example, if you settle a $700 debt for $300, you may have to pay tax on the $400 difference. This is because the IRS and many state tax agencies view forgiven debt as a form of income.
How Does Debt Settlement Work?
Credit card debt companies typically negotiate for you, eliminating the need to spend hours on the phone. If you hire one of these companies, they’ll typically advise you to stop paying on your credit cards to give them more negotiating power. You may also have to deposit money into an account each month to ensure that you have enough funds available to pay the settled amounts.
6 Reputable Credit Card Debt Companies
The following companies help consumers by negotiating debt settlements with creditors. Each company has positive reviews and offers services to customers throughout the United States.
Freedom Debt Relief has certified debt consultants available to discuss your finances and determine if debt settlement is the right option. If you choose this company to negotiate settlements on your behalf, you’ll make monthly deposits into an account insured by the Federal Deposit Insurance Corporation.
When there are enough funds to start negotiating, Freedom Debt Relief contacts creditors on your behalf.
A subsidiary of Beyond Finance, Accredited Debt Relief offers debt settlement and other services to help consumers improve their financial situations. During a free debt consultation, you’ll have the opportunity to discuss your finances and learn about the options available through Accredited Debt Relief.
The company helps with credit cards, medical debt and personal loans.
National Debt Relief has an A+ rating from the Better Business Bureau, giving you extra peace of mind as you work to settle your debts. After a free initial consultation, a representative from National Debt Relief will present you with a customized plan for settling as much debt as possible.
It takes approximately 24 to 48 months to negotiate with all your creditors.
Accredited by the Better Business Bureau, Pacific Debt Inc. has settled more than $300 million worth of debt for its clients. Company representatives negotiate with creditors to reduce interest rates on your debt and negotiate affordable settlement amounts. Pacific Debt Inc. also offers a free consultation to discuss your budget and determine your financial goals.
New Era Debt Solutions has been helping customers settle their debts for over 20 years. The company has an A+ rating from the Better Business Bureau and an average score of 4.9 on Trustpilot.
Customers appreciate that New Era Debt Solutions charges no up-front fees and requires a small monthly deposit, making it easier to get out of debt quickly.
Century Support Services has helped more than 250,000 people get relief from credit cards and other types of debt. When you contact the company, a member of the debt settlement team will review your financial circumstances, recommend a personalized debt relief plan and contact creditors on your behalf.
You don’t pay fees until Century Support Services negotiates your first settlement.
Choosing a Debt Settlement Company
If you think debt settlement makes sense for you, it’s important to choose a settlement company carefully. When you’re ready to reduce the amount you owe and put a stop to stressful collection calls, follow these tips:
- Check both Trustpilot and the Better Business Bureau to find out which companies have the highest ratings.
- Look for companies that charge no up-front fees. It’s against the law for a debt relief firm to charge a fee before negotiating at least one settlement on your behalf.
- Before choosing a debt settlement firm, check to see how long the company has been in business. The longer a company operates, the more experience its employees have in negotiating settlement offers.
- Browse each company’s website to make sure the terms of service are clear, and contact information is easy to find in case you need assistance.
- Check to see if the company is a member of the American Fair Credit Council.
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