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The Truth Behind 5 Debt Settlement Myths

Debt settlement is one option for dealing with problem credit card debt. Consumers who choose this option work with a for-profit debt settlement company. The company negotiates with creditors to reach a settlement agreement for less than the total amount the consumer owes. During the negotiation process, the consumer opens and makes deposits into a dedicated savings account. Once the debt settlement company reaches agreements with the creditors, the consumer pays the settlement amount in one lump sum. But there are persistent myths around debt settlement you should know  before committing to the process. Take a look:

MYTH

Only debt settlement companies can negotiate with creditors.       

FACT

Debt settlement companies don’t have a lock on negotiating with creditors. In fact, consumers can call creditors to try to negotiate lower interest rates and other concessions on their own. Learn some tips for negotiating with credit card companies.

Additionally, a nonprofit credit counseling agency, such as Take Charge America, can also negotiate with creditors on behalf of consumers as part of a Debt Management Plan.

MYTH

Debt settlement is the fastest way to get out of debt.

FACT

Problem credit card debt doesn’t just suddenly appear; and it doesn’t suddenly disappear, either. Debt settlement plans can take three years or more from start to finish. During that time, you will make payments into an escrow-like account until there’s a balance high enough money to pay off the settlement amount. Plus, the debt settlement company often requires clients to stop making payments on their accounts until the creditors agree to settlement terms. This can lead to accumulating additional late and/or over-limit fees, as well as negative entries on your credit report.

MYTH

Debt settlement will immediately improve a credit score.

FACT

Unfortunately, the opposite is often true. Paying back only a fraction of the total amount of debt owed can lower a credit score almost as much as declaring bankruptcy. Staying out of debt following settlement will improve a credit score, but it will take some time.

MYTH

Other than bankruptcy, debt settlement is the only way to get out of problem credit card debt.

FACT

Debt settlement isn’t the only option. There are several options available to help consumers regain financial freedom. For example, you may be able to work directly with your creditors to lower interest rates or, in rare cases, the total amount you owe. If you would like additional help working with creditors, you can work with a nonprofit credit counseling agency, such as Take Charge America, who can contact creditors on your behalf.

MYTH

All debts can be eliminated through debt settlement.

FACT

There are several types of debt that debt settlement will not eliminate, including student loans, back taxes and court-ordered alimony and child support obligations. Additionally, most secured debt, such as mortgages and vehicle loans, cannot be discharged through settlement.

Looking for alternatives to high credit interest rates?

We can help. Our online credit counseling will:

  • Provide a free financial assessment
  • Determine your income, expenses and total debt
  • Create a manageable budget
  • Suggest solutions to help you reach your financial goals, which may include a Debt Management Plan

Clients on a Debt Management Plan typically pay off credit card debt in 5 years or less. Sounds good, right?

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