Debt Settlement Companies: How They Can Help You Pay Back Debt for Less Than You Owe

Debt Settlement Companies

Debt settlement companies come to the rescue when you’ve gotten yourself in debt up to your eyeballs. If you have tens – or even hundreds – of thousands of dollars in debt, debt settlement companies can help negotiate with your creditors to agree upon a lower debt amount that is easier to swallow.

How do you know when you need debt settlement companies to intervene? If you’re losing sleep at night because you don’t know how you’ll make your next payment, or if the total debt equals far more money than you make in a year, you probably need debt settlement companies to help you out.

Choosing Debt Settlement Companies

But picking the right debt settlement company is nothing less than challenging. Debt settlement companies are not known for having the best reputations. You might say they’re only a few steps higher on the moral scale than a pawn broker or fly-by-night cash lender.

That being said, there are plenty of debt settlement companies that are truly legitimate; you just have to know what to look for.

Look for debt settlement companies with a Better Business Bureau rating. This rating is often found on a company’s website or on the BBB’s website. You might also see that they are a recognized institution if you see a BBB plaque on their wall when you visit them for a consultation.
Look for positive customer reviews. If other people are satisfied after working with a debt settlement company, then chances are you will be happy, too. Try to get in-person recommendations, where possible, not just online reviews that could be altered or forged by the company.
Weigh the negative customer reviews. Don’t turn a blind eye to negative reviews, but take them with a grain of salt, too. Chances are that a company might have done their best, but that the debtor thought they could have leveraged a better deal for them. However, if they complain of insanely high fees or poor treatment, you might consider shopping elsewhere.

Risks When Working with Debt Settlement Companies

Debt settlement companies aren’t exactly risk-free. There are many caveats you should take into account when hiring one, and it doesn’t just have to do with the integrity of the company. You’ve got several other factors going against you when trying to settle your debt.

You’ll still have to pay tax on the money you borrowed. You might have heard of mortgage debt relief and the tax act that goes along with it. In some cases, a person’s tax consequences are forgiven when their mortgage debts are forgiven. Well, for credit card debt or other unsecured debt, that isn’t the case. The IRS looks at any money you borrow and do not pay back as “income” because you never paid it back. This means that, even if you settled your debt for $2,500 out of $10,000, you still owe income tax on the $7,500 that you did not pay back.
You’ll owe the debt settlement companies very hefty fees. Debt settlement is far from cheap. In fact, you’ll end up owing them a large percentage of your original debt. So for a $10,000 debt, you might owe about $1,500 to the settlement company. And that number gets higher as your debt gets higher.
There are no guarantees. Debt settlement companies enjoy fairly unregulated business dealings. In other words, if they’re a fly-by-night joint, there’s not much you can do in the line of recourse. Your best bet is to try to pick the right one the first time around, but obviously that’s a loaded task.
Debt settlement companies don’t work on the same timetable you do. Yes, you know you need to get out from under your debt burden as soon as possible. And while debt settlement companies realize this, they’re not going to bend over backwards to make this happen. They might not be on top of your case as much as you’d like, so it may take months before you reach a resolution to your surmounting debt.
Debt settlement companies are only a bandage fix on a very big wound. You won’t kiss your debts good-bye in one swoop just because you hired debt settlement companies. The whole objective here is that the company buys you some time to save money to pay back your lenders. They also negotiate much lower debt amounts so that when you do make back that money, you don’t have to give so much of it back to your creditor. But unlike debt consolidation companies, you won’t receive huge sums of money to pay back your debts right away. Debt settlement companies arrange payment plans that may take several months – or over a year – to pay back.

So while debt settlement companies don’t sound like the ideal fix to your credit problem, you can be sure that it’s better than having to declare bankruptcy or be taken to court over not paying your bills.