Debt settlement might seem like a quick solution to money problems; but, when they are offered by for-profit companies, they could come with risks.
If you are struggling with you debt, you should first contact your creditors. Often times, they will work with you if you are undergoing financial struggles. However, they are much more willing to work out a new repayment plan if you call them before you miss payments. When dealing with secured loans, many lenders are willing to work with you if they believe you're acting in good faith and the situation is temporary. Again, first contact creditors directly and immediately.
Some people have an overwhelming amount of debt and look for a solution by turning to debt relief or settlement companies. Debt settlement programs typically are offered by for-profit companies, and involve them negotiating with your creditors to allow you to pay a “settlement” to resolve your debt — a lump sum that is less than the full amount that you owe. To make that lump sum payment, the program asks that you set aside a specific amount of money every month in savings. These programs often encourage or instruct their clients to stop making any monthly payments to their creditors, which can be scary and against your own financial intuition.
Debt settlement programs can be risky because many people have a difficult making the payments for the required amount of time and drop out of the program. Additionally, creditors have no obligation to agree to negotiate a settlement. And the debt settlement companies often try to negotiate smaller debts first, leaving interest and fees on large debts to continue to mount. Because debt settlement programs often ask or encourage you to stop sending payments directly to your creditors, they may have a negative impact on your credit report and other serious consequences.
Unfortunately, there are many companies that exist by taking advantage of families in debt. The Federal Trade Commission offers the following tips on coping with debt. Avoid debt relief organizations (whether it’s credit counseling, debt settlement, debt relief, or any other service) that do the following:
Before you do business with any debt relief service, do you research. Contact the Attorney General’s office to see if they can tell you if any consumer complaints are on file about the firm you're considering doing business with.
No matter which steps you take to reduce your debt, it is going to take work on your part to improve your credit score. Consider signing up for financial counseling or a financial education course before you do something drastic like a debt settlement or bankruptcy. More often than not, with hard work and a (free) plan, you can change your financial picture for the better.
Montana Credit Unions for Community Development (or MCUCD) is the award-winning, charitable arm of the Montana Credit Union Network. A state-wide nonprofit organization, MCUCD works together with the state's credit unions to improve the lives and financial independence of all Montanans.