Mary Grace McCormick, Credit Writer
A debt settlement program is a service administered by a for-profit company that allows a debt holder to settle debt for less than the amount owed. The advantages of a debt settlement program are obvious: getting part of the amount owed forgiven and stopping collection efforts. How exactly debt settlement programs work is less well-known, however.
In general, a debt settlement program involves hiring a debt settlement company that negotiates on behalf of the debt holder with the creditors looking to collect the debt, in exchange for a percentage of the debt or the amount ultimately forgiven. When choosing a debt settlement program, it’s wise to consult sources such as Better Business Bureau and Trustpilot to get a sense of customer satisfaction and to review the companies’ websites to get a preliminary estimate of their fees. A few of the most popular debt settlement programs are listed below.
Popular Debt Settlement Programs/Companies:
Step One: Hire a Debt Settlement Company
Before you begin a debt settlement program, you must pick a debt settlement company. This is a very important step in the process because selection of a debt settlement company dictates how much money you will save. All debt settlement companies charge fees as a percentage of either the original balance or the debt saved. Make sure you request written confirmation of a company’s fee structure, so you are not surprised when your final bill comes.
Step Two: Begin Monthly Payments to Your Debt Settlement Company
Once you employ a debt settlement company, you will start making monthly payments to them instead of your creditor. There are two reasons for this. First, creditors generally do not settle accounts that are in good standing, so you must allow them to become delinquent (very carefully!). Second, unless you can afford a lump-sum payment for your settlement, you will need to start making monthly deposits to build up to an attractive settlement offer.
Step Three: Reach a Settlement
When your debt settlement company has determined that you have reached an appropriate amount for a settlement, they will reach out to your creditors to negotiate. Once they reach an agreement, your creditors will be paid, and your settlement company will send a bill for their services.
Debt settlement programs have a clear advantage: You get to settle for less than the amount you owe. But debt settlement programs also come with certain drawbacks, so it’s important to consider each one before beginning a program. These drawbacks include fees, the risk of scams, credit-score damage, and tax consequences. You can read more about these drawbacks in our debt settlement guide and decide whether it’s the best choice for resolving your debt.
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