What Is Debt Settlement?

In the midst of the season it's easy to forget how expensive it can be, but when January rolls around, credit card bills are there to remind you.
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With the holidays over and the leftovers gone, its time to deal with the outcome of all that shopping and gift giving -- the bills. In the midst of the season it's easy to forget how expensive it can be, but when January rolls around, credit card bills are there to remind you. It can be even worse if you've already been racking up expenses and debt. In some instances, you may need to take serious steps to get out of debt. One of the options you might consider is debt settlement.

Simply put, debt settlement is the process of paying your creditors less than what you owe and having the entire debt erased off the books. But as easy as this may sound, accomplishing it can be complicated and difficult, and can have long-lasting implications.

How Debt Settlement Works

If you're going to have a hard time paying your bills, you should reach out to any debt settlement company you owe funds to before you become six months delinquent on the bill. If you don't contact a debt settlement agent before this time, the company that holds the debt will generally write it off. This can have serious repercussions on your credit score.

A debt settlement company will negotiate with the firm that holds the debt on your behalf and will lower the obligation to an amount you can afford. To do this, the debt settlement company will need to review your complete financial statements. This means they will need to look over your bank statements, credit card balances, asset reports and any other documentation regarding what you might owe. From there, the debt settlement company will negotiate on your behalf to lower the rate.

The debt settlement company makes money by charging you a fee for their services. In general, that fee is a percentage of the amount by which they lower your debt load.

Downsides of Debt Settlement

Debt settlement is not without cost. While debt settlement is not as bad as a straight default, the process can do serious damage to your credit score and can impair your ability to borrow money in the future. In addition, some debt settlement companies advise their clients to stop paying their bills during settlement negotiations. This practice can lead to late penalties, debt collection efforts and possibly lawsuits, all of which will increase the expense to you. Finally, any decrease in your debt load is taxable. If you have $1,000 in debt that you settle for $500, you have to report an additional $500 in taxable income on your next tax return.

Alternatives to Debt Settlement

Debt settlement is a last resort for people facing serious cash problems and it should not be entered into lightly. If not done properly, you could end up with more debt than you had at the beginning of the process. Before beginning any debt settlement process, consider working with a credit counselor. Credit counselors are generally non-profit organizations that can help you manage your finances and can negotiate on your behalf with creditors.

While you don't get the immediate decrease in debt that you might achieve in a debt settlement, credit counseling can help you avoid a lot of the damaging effects that also go along with a settlement. Additionally, credit counselors can ensure that your creditors won't seek to collect on your debts while the counselors are helping to advise you and restructure your finances.

In short, you should really only proceed with debt settlement when credit counseling fails. Before you choose debt settlement as an option, make sure that the associated fees and penalties will be less money than the potential amount of forgiven debt.

Best Debt Settlement Services

If you are looking for a reliable debt settlement service, you should be careful since some services that offer debt settlement can try to rip you off. Here are two of the most trusted debt settlement companies that you can try:

Best Overall: National Debt Relief

Price: 20% of whatever you end up saving by using their services. (NOTE: They don't charge a monthly service fee like other debt settlement services.)

Features: Free quote, flexible payment schedule, services for secured and unsecured loans, professional advisors, self-help tools, mobile access to their site and budget planners.

Guarantee: 100% money back guarantee if the service doesn't work for you or if you are not completely satisfied.

Customer Service: Phone, chat, email and social media.

Runner-up: CuraDebt Debt Relief

Price: $59 monthly fee plus 20% of what you save on the initial debt.

Features: Free quote, flexible payment schedule, services for secured and unsecured loans, professional advisors and self-help tools. Doesn't allow co-signer like National Debt Relief.

Guarantee: CuraDebt doesn't offer a money back guarantee.

Customer Service: Phone and email.

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