Many people buckling beneath the weight of thousands of dollars of debt turn to a debt settlement or debt relief company to solve their debt problems. Debt settlement companies agree to try and settle your debts for a reduced amount or with better terms for a fee that’s usually based on a percentage of the amount the company saved you on the settled debt.
While signing up with a debt settlement company may seem like a quick way to get out of debt fast, that doesn’t mean it’s the best option for debt-ridden consumers. Then again, debt settlement could still be a good option for some. So, how can you know if you should hire a debt settlement company?
Below are seven questions to ask yourself before you enroll in a debt settlement program.
1. Is the debt settlement company reputable?
If you get a robocall from a company promising it can settle all your debts for an upfront fee, there’s a good chance it’s a scammer preying on your debt desperation. But robocallers aren’t the only debt settlement companies that don’t come through on their promises. While many debt settlement companies are legitimate, the debt settlement industry is also known for unsavory companies using deceptive practices.
Check with your local consumer protection agency, the Better Business Bureau and the state Attorney General to check whether a debt settlement company has any complaints before enrolling in any debt settlement program. The state Attorney General’s office can also verify whether the debt settlement meets state licensing requirements.
Find out: 7 Signs of a Debt Settlement Scam
2. What fees will I have to pay?
Debt settlement companies make their profit from fees they collect from customers. However, the debt settlement company isn’t legally allowed to collect any fees until after it settles, reduces or changes the terms of at least one of your debts, according to the federal Telemarketing Sales Rule.
The debt relief company also can’t charge any fees until you agree to the settlement agreement or whatever other result the debt settlement company reached with the creditor and it’s made at least one payment to that creditor.
Find out: What You Can Expect From a Debt Settlement Program
3. Has the debt settlement company told me all the information upfront?
According to the FTC, a debt settlement company must provide certain legally required information to you before you sign up for its services. That information includes all fees, conditions and terms of service, along with how long it could take to get results.
The debt settlement company also must tell you the amount you need to save in a dedicated account before the company makes offers to your creditors and that the money in the account belongs to you. The company also needs to inform you that you can withdraw the savings at any time.
The company must also inform you of possible negative consequences such as potential harm to your credit score if you stop making payments to creditors.
4. Will my creditors negotiate with a debt settlement company?
Not all credit card companies will negotiate with a debt settlement company, even with the customer’s consent. If the creditor refuses to negotiate, however, the debt settlement company can still settle the debt eventually with the collection agency that purchases it.
The downside of such a settlement is that it can take longer. That’s because the issuer has to write your debt off first and sell it to a collection agency, which can take up to six months after you stopped paying.
5. Will debt settlement hurt my credit?
If a debt settlement company advises you to stop making payments to your creditors, that action could damage your credit, according to the Consumer Finance Protection Bureau (CFPB).
“If you stop making payments, you will likely damage your credit,” says the CFPB. “You may face collection efforts, additional late fees, and penalty interest charges, and you might be sued.” As a result, your debt could grow even larger, especially if the debt settlement company’s negotiations are unsuccessful.
Find out: How Long Does Debt Settlement Stay on Your Credit Report?
6. Could I negotiate my own settlement?
Before signing up for a debt relief program with a debt settlement company, try calling your creditors to find out if they’re willing to negotiate with you directly. If they are open to settling your debt, you will save money on all those fees that a debt settlement company would have charged.
7. Would a credit counselor be a better option?
If you seek credit counseling at a nonprofit credit counseling agency, that organization may be able to negotiate a debt repayment plan or debt settlement with your creditors at no cost, or for only a nominal fee.
Before signing up for a debt settlement program, consider making an appointment to meet with a credit counselor to review all your debt repayment options.
