If you’ve made poor credit decisions, experienced a financial disaster, or ran up a large amount of credit card debt in the past, then you might be familiar with debt settlement. There are many third-party companies that can help consumers settle their debt for pennies on the dollar. But, like most things, setting your debts has consequences.
A debt settlement is the process of negotiating a payoff with your creditor for less than the amount you actually owe. For example, if you owe a credit card issuer $10,000 on a Visa or MasterCard and the company agree to accept only $5,000 instead as payment in full for your debt, you’ve just settled the account.
You can settle debts with your credit card company and other lenders on your own. Or, you can hire a firm that specializes in debt settlement to handle the process for you. In addition to the company’s fees, you typically pay the debt settlement company one set payment each month, and they pay your monthly debts for you according to a repayment plan.
Using a debt settlement company allows you to make only one payment, and it may reduce the total annual interest rate that you pay on the debt. Or, you may be able to negotiate debt settlements yourself with your individual lenders.
What is a debt settlement?
With debt settlement, consumers are often able to reduce their overall debt and pay only a portion of what is actually owed to their creditor. When the consumer pays the agreed upon settlement, the lender will typically update the account on the consumer’s credit report to reflect a balance of zero dollars.
However, in addition to the zero balance, a notation is also usually added to your credit report which reads something like “settlement accepted on this account,” “partial payment plan,” or “settled for less than the full amount.”