7 Debt Settlement Myths Debunked

Debt can be an overwhelming burden. Between the collection calls, late notices, and the stress, it is all too easy to get frustrated.

Getting out of debt is possible, though. Options like debt settlement can help you formulate a repayment plan, avoid bankruptcy, and get your financial life back on track. But debt settlement can be a tricky process. Before you sign up with a debt settlement company, make sure you know the common myths – and how to avoid them.

1. Myth: Your debts will “drop off” eventually, so why bother?

A lot of well-intentioned internet wisdom says ignoring a debt you can’t pay is OK since creditors are unlikely to take any real action and the debt will eventually drop off your credit score.

Some debt – like credit card debt – will drop off your credit report in seven years, but that doesn’t mean creditors, or debt collection agencies that buy and attempt to collect on a debt, will let a balanced ride. “The best advice for someone in debt is not to ignore it,” says J.R. Skrabanek, Senior Counsel with Jones Law Firm in New York, New York. Acting quickly can save major headaches in the long run.

Find out: How Long Will Debt Settlement Stay on Your Credit Score?

2. Myth: Once your debt is sold to a debt collector, it is too late to do anything

Creditors often charge off debts and resell the debt to a collector who then tries to collect from you. Having a charge off is a pretty big black mark on your credit, but once the original creditor has written it off, some armchair financial experts will tell you there’s nothing left to do.

In truth, collection agencies will go to great lengths, often up to filing lawsuits against you, to try and recoup the balance. On the flip side, if you’re willing to work with them, many will also offer payment plans, and negotiate the balance and interest rate in debt settlement. The key is acting on it as soon as you can. “Often, creditors will accept payment plans in lieu of filing lawsuits, but they have very little incentive to make a “deal” after they already have a judgment,” says Skrabanek.

3. Myth: Bankruptcy is the best option

Carrying debt can be overwhelming, and many people believe that bankruptcy is their only option – or their best option – hoping it will eliminate their debts quickly and help them get on with their lives.

“Bankruptcy should be a last resort,” says Marc Dann, attorney and founder of DannLaw. Bankruptcy stays on your credit report for up to 10 years, impacting you longer than many other credit blemishes. It also won’t wipe the slate clean. “[Some] Student loans, for example, are not dischargeable in bankruptcy,” says Dann.

Instead, he recommends starting with other options like seeking out a nonprofit credit counseling agency or an attorney first.

Find out: Qualifying for Student Loan Bankruptcy Discharge

4. Myth: You can’t negotiate debt on your own

Some credit repair companies make claims that they, and only they, can negotiate consumer debt. The truth is: if you’re in debt, you can contact your creditors yourself.

“There is no harm in trying to negotiate short payments or interest rate reductions on debts,” says Dann. It may take some serious legwork to negotiate a payment plan and get your debts back on track, but typically, you can, with one notable exception: “Anyone who has been sued or who is being garnished for a judgment absolutely needs to consult a lawyer,” says Dann.

If you’re feeling overwhelmed, you can also seek help, just be careful who you contact. Dann recommends seeking out a nonprofit credit counseling agency to help create a repayment plan.

5. Myth: Debt settlement companies just want to rip you off

Due largely to some unscrupulous advertising by some companies, debt settlement can get a bad rap.

Debt settlement programs can work for some consumers. The key is doing your research ahead of time and finding a legit company to work with. Ask for recommendations from trusted friends or a financial advisor. Look for nonprofits that can also help you rebuild your credit and manage your finances. And be wary of advertising that makes big or unrealistic promises.

6. Myth: Debt settlement can slash your debts by 50 percent

One such big advertising claim is the promise to slash anyone’s debt in half or more.

In some debt settlement cases, creditors do lower the overall balance on an account, but “50 percent reductions are a complete fantasy,” says Dann. Creditors will consider several aspects of an account, as the age of the debt, the amount owed, and the consumer’s ability to repay when considering a debt settlement deal. “If a consumer/borrower constructively puts forward a legitimate reason why they can’t pay most lenders would rather collect something than nothing and they will work with a borrower,” says Dann, but you should expect to repay most –if not all – of what you owe.

7. Myth: Debt settlement is the fastest way to get debt free

Simply put: There’s no quick fix in the debt game.

Be wary of any ads promising fast relief to debt problems. While every situation is different, in some cases “it can take years to complete a debt repayment plan,” says Dann. Expect to spend at least several months working with your creditors and making payments, whether you DIY or opt for a debt settlement. No one likes waiting, but the slow and steady approach can help you become debt free.