If you're struggling with more bills arriving each month than you're able to pay, you might consider working with a debt settlement company (which is different from a debt consolidation company, although many do both). Debt settlement companies can be helpful, but consumers should learn about how these services work before making any agreement. Here's what you need to know to determine whether debt settlement is right for you.
How does debt settlement work?
Debt settlement companies approach your creditors and negotiate a plan in which each creditor agrees to cancel the loan for less than what you owe in exchange for a lump sum payment. Once this agreement is made, you pay a monthly amount to a special deposit account set up through the debt settlement company. You also pay fees to the debt settlement company for its services. When the amount in your deposit account reaches the level that one of your creditors has agreed to settle for, the settlement company pays the creditor, ending the debt.
Most people can do their own negotiating
If you can get access to a lump sum of money, from a family member or some other source, it's worthwhile to call up a creditor yourself and simply ask whether it will accept less than the total amount you owe if you pay a lump sum. Even if you have to do some saving up, you can still talk to a creditor about a plan for paying off the debt in a few months for less than you owe.
Pros: When debt settlement is helpful
- If you already have poor credit and are losing sleep over bills you can't pay, having a legitimate debt settlement company negotiate on your behalf can feel reassuring.
- If you are not fluent in English or if you feel uncomfortable making phone calls to creditors, a responsible debt settlement company can provide you with a friendlier pathway out of debt.
Cons: Reasons for caution
- You may pay a percentage of your debt upfront to the settlement company, plus a monthly fee, and then a percentage of any money the debt settlement company ends up saving you.
- Debt settlement can cause significant damage to your credit rating depending on how it's reported, so you should not consider it if you have good credit.
How to move forward
You can gain a good understanding of debt settlement by reading the government's FTC page about this topic. Be aware that the IRS considers any amount of debt that is forgiven as income, and you will have to pay income tax on that amount. Before deciding on debt settlement, you will probably benefit from a free consultation with a consumer credit counselor or a bankruptcy lawyer. When you're in debt, you have several options, and it's a good idea to explore all of them before choosing one. We did some research and here are the top debt settlement companies:
Best Overall: National Debt Relief
Price: National Debt Relief is one of the more affordable debt consolidation services. First, it doesn't charge a monthly service fee like most other debt consolidation and settlement services. They do, however, charge 20 percent of whatever you end up saving by using their services. So if your debt is $10,000, and you end up paying only $9,000, they would receive $200. On the plus side, you can get a quote and a consultation for free with National Debt Relief.
BBB Rating: A (Also accredited by both the American Fair Credit Council and the International Association of Professional Debt Arbitrators.)
Features: National Debt Relief has the most features of any other debt consolidation and settlement service that we saw. It includes a free quote, flexible payment schedule, services for secured and unsecured loans, professional advisors, self-help tools, mobile access to their site and budget planners. They also allow you to have a co-signer, which is important for most people who are stuck in debt.
Guarantee: One of the reasons we like National Debt Relief is because of their 100 percent money back guarantee. This apparently is fair game if the service doesn't work for you or if you are not completely satisfied with the service.
Customer Service: The site also has a comprehensive customer service program, including access to a representative by phone, chat, email and social media. Although not always the speediest, the customer service answers to our questions were always helpful and informative. Here is a good comparison between National Debt Relief and our second choice, CuraDebt as well as a review of Accredited, which is another top debt relief program.
Runner-up: CuraDebt Debt Relief
Price: CuraDebt charges the same amount as National Debt Relief; 20 percent of what you save on the initial debt.
BBB Rating: N/A (Also accredited by both the American Fair Credit Council and the International Association of Professional Debt Arbitrators.)
Features: CuraDebt was founded in 1996, which means it has been in business for more than a decade longer than National Debt Relief. CuraDebt offers most of the same features that National Debt Relief does, including free quote, flexible payment schedule, services for secured and unsecured loans, professional advisors and self-help tools. One of the things that CuraDebt doesn't offer that National Debt Relief does is the option of having a co-signer. They also don't offer mobile access to your account.
Guarantee: CuraDebt doesn't offer a money back guarantee.
Customer Service: CuraDebt only offers phone and email customer service options, which limits your options. It can be difficult to get an answer, but the customer service representatives are usually helpful and friendly.