Debt hurts.
While increasing stress, it drains our financial freedom over an extended period of time.
It’s no wonder, then, that debt settlement companies have surged in popularity.
After all, the American populace is grappling with record amounts of credit card debt. In early August, credit card balances officially surpassed $1 trillion for the first time ever.
As a result, many consumers are wondering:
- Can debt settlement help me?
- Could debt settlement companies harm me?
- What debts are eligible for settlement?
In this blog, we’ll answer each of those questions so you can move forward with confidence.
What is Debt Settlement?
Debt settlement involves negotiating with a creditor.
The purpose is clear: to persuade the creditor to accept less than the full amount.
For example, let’s say Mateo has an outstanding medical bill of $5,000.
Despite his best efforts, he cannot pay the bill in full, though he eagerly wants to get it off his credit report.
After assessing his options, Mateo pursues debt settlement, where he asks the creditor to accept a smaller amount.
Through a lengthy process of negotiation, he and the creditor agree to a settlement of $3,500 — still a large sum, but far less than the original amount.
Thanks to the creditor’s flexibility, Manuel can choose to pay the reduced amount in installments or a lump-sum payment.
As you might imagine, negotiating with creditors isn’t easy — and it can be overwhelming.
That’s where debt settlement companies enter the picture.
Understanding Debt Settlement Companies
Debt settlement companies negotiate with creditors on your behalf.
They specialize in helping clients with personal loan debt, like credit cards and medical bills.
If you decide to hire a debt settlement company — or a “debt relief company” as they’re often called — you can expect to follow a five-part process:
- For starters, the company will ask you to cease making payments to your creditors. They’ll then advise you to invest that money into a savings account that they oversee.
- While you save money (often over a period of several years), the debt settlement company will negotiate with your creditors.
- After your savings account has grown to an acceptable amount, they will use it as leverage.
In other words, they will encourage the creditors to accept a lump-sum payment, rather than waiting for you to settle the original amount. - After your debt is settled (and an offer is accepted), your account will likely be closed.
- Finally, the debt settlement company will charge you a fee (a percentage of the total debt owed).
That’s how the process typically works.
Before you hire a debt settlement company, be sure to weigh the pros and cons.
Potential Benefits of Debt Settlement Companies
There are three advantages to working with debt settlement companies.
First, they can help you lower your total debt amount. In a best case scenario, they may be able to reduce your outstanding debts by as much as 50%.
Debt settlement companies can also help you avoid filing for bankruptcy.
While debt settlement negatively affects your credit history (as we will discuss below), it will shield your financial difficulties from becoming a matter of public record.
Finally, a debt settlement company can help put an end to creditor harassment.
After negotiating a settlement, you will be free from receiving persistent emails, phone calls, and text messages.
The Risks and Drawbacks of Debt Settlement Companies
Debt relief companies have one goal in mind: to negotiate a settlement.
Unfortunately, they’re not always successful in their endeavors.
Far from it.
According to a study by the Federal Trade Commission (FTC), debt settlement company “completion rates” range from 35% to 60%.
In other words, there’s no guarantee of winning a settlement — and creditors aren’t legally required to accept a settlement offer.
While a failed settlement leaves you burdened with debt, there are other ramifications to consider.
For example, if you stopped making monthly debt payments — at the request of your debt settlement company — those unpaid charges, penalties, and interest will be added to your original balance.
As a result, your total debt could drastically increase during the period of attempted settlement. On top of that, the debt relief company may still charge you a service fee, even though they failed to win a settlement.
Credit score collapse is another major concern.
After all, settled debts remain on your credit report for seven years. That could make it harder to access important credit products in the future.
Finally, it’s important to note that some debt settlement companies are fraudulent.
Last year, one illegitimate company was caught by the FTC, who found them charging consumers up to $18,000 under the promise that they would eliminate their outstanding debts.
If a company ever makes unsolicited offers, charges upfront fees of any kind, or guarantees outcomes, don’t hire them.
While such promises might seem tempting, no debt settlement company has a perfect record.
P.S. Before you hire a debt settlement company, be sure to contact your local consumer protection agency. Ask them to check for any complaints against the debt settlement company you have in mind.
To find the consumer protection office nearest you, click here.
Debts Eligible for Settlement
Most forms of “unsecured” personal debt can be settled.
In other words, you can easily negotiate debts stemming from credit cards, personal loans, and medical bills.
Conversely, most “secured” debts are not eligible for settlement. This includes any debts backed by property, like your house or car.
Note: While private student loans are eligible for debt relief, federal student loans are not.
Healthy Debt Management Strategies
If you’re saddled with debt, it can be difficult to know where to start.
Here’s some good news: there are many helpful strategies to consider, and debt settlement isn’t the only option available to you.
While managing a healthy budget, consider implementing additional strategies, including:
- The Debt Snowball Method: This popular tactic prioritizes paying down your smallest debts first.
For example, let’s say Lucia has a revolving balance on a department store card and a personal credit card, as well as some unpaid student loans.
With the “snowball” method, she would start by paying off the department store card. Once her balance returns to $0, she could move on to tackling her personal credit card.
Finally, Lucia would aim directly at her student loans — and if possible, she would increase the size and regularity of her payments to get out of debt even faster.
- The Debt Avalanche Method: As the opposite of the “snowball,” the “Avalanche Method” takes a decidedly more aggressive approach.
If we continue with the earlier example, this approach would encourage Lucia to pay off her student loans first (and her department store card last).
While it would require more dedication (and up-front capital), it would ultimately save Lucia a lot of money in the long run — and get her out of debt even faster. After all, she would prevent compound interest from driving up her principal balance.
Want to learn more? Click here to check out our complete guide to debt repayment plans.
- Debt Consolidation: If you have multiple types of high-interest debt, this strategy is worth your consideration.
Here’s how it works: with debt consolidation, you can combine several existing debts into a new loan with lower interest rates and better repayment terms.
This would empower you to pay down multiple debts at once (while lowering your total monthly payments).
To view our step-by-step guide to debt consolidation, please click here.
One more thing: you don’t need to hire a company for debt settlement. While that option is available to you, you are always able to negotiate with creditors on your own time.
As always, be sure to contact a financial professional if you have any questions about debt settlement and other debt repayment strategies.
Moving Forward
While debt is stressful, it’s also a part of life.
In fact, the vast majority of Americans — over 340 million people — have some form of debt at this very moment.
You’re not alone, and things will get better.
Just remember: the journey to becoming debt-free is a marathon, not a sprint.
Plan accordingly, be patient, and trust the process.
At uLink, we’re with you every step of the way.
While you secure your financial future, we’ll be here to help you support your family to the fullest extent.
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