Posted on May 28, 2009 at 7:42 am I am trying to get out of debt and am starting to do some research. I understand the potential of settling my debts but why could debt settlement be bad for me? I want to make sure I know the drawbacks too before diving into something like this. Debt stinks!

Posted on May 28, 2009 at 7:49 am Well, from a credit standpoint, settling your debts can be "bad" because in order to settle a credit card debt it has to be delinquent. As a result, if you are past due on your credit cards, it will be reported as such on your credit report and this has a negative impact on your payment history and thus your credit score. With that in mind, a lot of people trying to settle their credit card debt are already being reported as past due so it may not make much of a difference. Does anyone else have additional insight as to why debt settlement may be bad?

Posted on May 28, 2009 at 2:02 pm Debt settlement may also be viewed as "bad" since the creditors reserves the right to pursue legal action to collect the debt from anyone who is enrolled in a debt settlement program (not because they are enrolled, but because it is their legal right to do so on any debt that is past due). While legal action for some may be entirely avoided, for others it is a reality that must be faced. It is important to keep in mind however from a settlement standpoint that if a creditor sues you, and you have the money, the lawsuit handling the debt for collection most likely will still settle. It will simply become an issue of when and how much. If you can't settle, your second option would be to set up a payment plan for the balance in full. Has anyone ever done this? While it may not be a settlement, it still establishes repayment terms, usually fixed, so the debtor at leats knows how long it will take to pay off.

Posted on May 28, 2009 at 7:03 pm I think its only fair to bring up some points as to why a debt settlement program may be good, so people don't get the wrong idea. It allows people who are behind on payments to budget an affordable monthly amount that they can save for a potential settlement later on down the line. For people who can't afford their minimum payments, this is a good thing as it forces them to budget a certain amount each month, instead of continuing on with their financial struggles with no fixed plan. Furthermore, if you consider that most people attempting to settle their accounts are already behind, the impact on the person's credit score is less severe as they are already being reported as past due. And, it gives them an outlit to avoid bankruptcy. Not to mention the potential savings that one could experience after settling their credit card accounts.

Posted on May 29, 2009 at 1:23 am You're forgetting to mention the fact that you may get collection calls in a debt settlement program.  I should know - I used a service myself - and the creditors were calling pretty consistently until the debts were settled.  On the bright side, I settled everything for about 45% of what I originally owed (interest keeps running on your account until it is settled so your balances increase - so that's another reason why people say debt settlement is bad - ).  With the fees paid to the company, plus I paid some taxes on my savings (another reason why people say you should avoid settling), my total cost was about 65% of what I originally owed.  

Posted on May 29, 2009 at 5:44 am The truth of the reason why debt settlement has a bad reputation is two-fold: 1) There are a lot of bad companies that rip people off  because the industry is unregulated for the most part -  There are flat out scams out to make a quick buck that will lie to you and then less obvious and more prevalent cases where the company doesn't disclose anything to you and tells you that you should have read the contract if you complain. 2) The credit card companies are on a full out PR assault on debt settlement companies because settlement companies cost them millions of dollars annually by settling for lower percentages than consumers would if they did it themselves.  If you read the news about the credit card industry you see that they're pushing credit counseling on people like crazy.  I read an article recently about a single mother who did credit counseling and why it's such a good option for people.  In the last sentence they politely mention how the single mother had to drop out because she couldn't afford it anymore.  This was CNN!  If I was a credit counselor I wouldn't have the audacity to write this on my personal blog.  http://edition.cnn.com/2009/US/05/20/mainstreet.pay.off.debt/index.html      

Posted on May 29, 2009 at 5:51 am Sorry for the double post, but here's another personal favorite of mine showing the media bias against debt settlement companies because of the credit card PR machine: This is the NYTimes urging people to stay away from debt settlement companies and there's a paragraph towards the middle of the first page where they mention how collection agencies don't like settlement companies because they can't collect as much versus settling directly with the consumer!  Wait....isn't that a good thing for consumers?  http://www.nytimes.com/2009/04/20/business/20settle.html?emc=eta1

Posted on July 7, 2009 at 8:57 am Father Bill brings up a very important point- you can get collection calls and be taxed on the savings, and obviously will have to pay a fee to the settlement company who is working on your behalf. So, for people asking why is debt settlement bad, this insight should address that question and illuminate the fact that for a lot of people debt settlement isn't bad, it just needs to be understood in greater depth. And, with all of those things accounted for, it seems Father Bill still saved quite a bit of money. So the lesson learned is to know what settling your debts entails, what some of the consuquences are and in addition what the benefits are in the end if the negotiations are successful.

Posted on July 20, 2009 at 10:46 pm I'veh eard that after a debt settlement program is completed, a consumer would have difficulty reapplying for new credit--it would take a few months or even a few years before s/he would be approved to avail of new credit. Is this true?

Posted on July 21, 2009 at 1:32 am This may sound too good to be true, but an article read also claims that debt settlement not only renders your credit score in the negative, but you'll also have difficulty getting a new job or a competitive insurance rate because of bad credit--all because of debt settlement? I personally think that's baloney, but what do you guys think?