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Debt settlement companies: can you trust them?

Finding yourself under a figurative mountain of credit card debt is one of the easiest things you can do financially as an American. If this describes you, then you can take some solace that you are in popular company: the average American household that carries a credit card balance owes more than $15,000. And if you are like many other Americans, you are looking for a way to get out from under that balance.

Just like some diet plans promise quick results in return for minimal effort, typically based on some supposed miracle drug, there are companies that will promise you the same kind of relief in a fiscal sense. They claim to be able to eliminate your debts for only a fraction of the balance owed. But how do such pennies-on-the-dollar claims work in actual practice? And is one of them right for you?

Credit card settlement companies often rely on you establishing an account into which you are to pay sums monthly until you have saved up enough money for the settlement company to offer to the credit card issuer in lieu of paying off your balance in full. These companies will also frequently advise you to stop making monthly payments on your card balances. While the idea may sound persuasive on first examination, you need to be aware of some potential downsides:

  • The settlement company cannot compel the credit card issuer to accept a settlement amount.
  • Ceasing to make your monthly payments on credit cards can still have a negative effect on your credit score, even if the card issuer goes along with the settlement offer.
  • Settlement companies can attempt to lock you into plans that can take years to complete, during which you will need to keep paying the settlement company monthly. Evidence suggests that many, perhaps most people who start out with such a payment plan to a settlement company cannot sustain these payments, and this can leave some debts unsettled.

Before you sign up with a credit card settlement company, it is advisable that you do your homework on that company first. As an alternative, if your credit card debt has become insurmountable, you may also want to discuss options with a bankruptcy attorney before committing yourself to an alternative that can have negative consequences and may still leave you with significant debts.

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