What You Need to Know About Debt Settlement Before Diving In

Debt repayment can be confusing. There are numerous options and considerations to weigh, depending on your financial situation. While debt settlement and debt management have similar names, the processes and outcomes are very different.

How Debt Settlement Works

Offered by for-profit companies, debt settlement is a service that allows clients to pay back only a portion of the debt they owe. Here’s a simple breakdown:

• People who choose debt settlement make regular deposits into a savings account until there is enough for the debt settlement company to negotiate lump-sum payments.
• During this process, the debt settlement company may advise clients to stop making payments to their creditors. This is a tactic to get the creditor to accept a lesser amount to settle the debt.
• Once creditors accept the lump-sum payments, accounts are considered paid-in-full.

There are serious drawbacks and consequences to this process, which aren’t always shared upon signing up.

Risks of Debt Settlement

Failure to pay your creditors, even at the advice of a debt settlement company, can have serious negative consequences, such as:

• High fees to the debt settlement company to “settle” the debt
• Tax implications related to any forgiven debt, potentially resulting in a large and unexpected tax bill
• Significant drop in credit rating, affecting your ability to get housing, apply for an auto loan or even find a job in some cases

Any benefits gained during the debt settlement process are commonly canceled out by the hidden costs and lower credit score.

Additionally, it’s important to note that debt settlement is only offered by for-profit companies, which means their focus is mainly on making a profit rather than helping consumers improve their overall financial health.

Take Charge America is a nonprofit organization, meaning we keep your best interests in mind at all times. We are not incentivized to steer you in a specific direction. Credit counselors are trained and certified in consumer credit, debt management and other money matters, providing you with objective advice and personalized guidance to eliminate debt.