Debt settlement is the act of resolving delinquency with a creditor for less than the amount owed through a large lump-sum payment. The main benefit of a debt settlement plan is that, if accepted, it can help you get out of debt sooner for less than what you owe. However, there are several risks associated with the debt settlement strategy.
Consumers can negotiate independently or work with a debt settlement company for a fee. Here’s roughly how working with a debt settlement company will play out:
If you feel working with a debt settlement is your best option, do your research before signing a contract. The Office of Minnesota Attorney General Keith Ellison provides helpful tips for consumers to avoid debt assistance scams.
Nonprofit credit counseling with certified personal finance professionals might be an option if debt settlement doesn’t seem like the best fit for you. Our partners at LSS Financial Counseling and other financial service providers are good examples of reputable services.
You’ll receive personalized feedback during a credit counseling session like free budgeting help or a credit report review, action steps to improve your situation, and referrals to other resources. Counselors may also advise you to consider a debt management plan (different from debt settlement) to help you get out of debt with lower interest rates and a streamlined payment schedule.
No matter what route you take, remember that there is no quick or magic fix to resolve or eliminate consumer debt. Sustainable debt relief requires skills we all can learn or improve on (like discipline and budgeting) and resources not all of us have equal access to (such as money, time, or a support system). We strongly encourage you to be practical, patient, and kind to yourself as you take steps to become debt-free.
Money Management E-Newsletter: May 2022