Magazine article Black Enterprise

What You Should Know before Settling Credit Card Debt: Be Aware of Risks before Hiring a Company to Handle Negotiations

Magazine article Black Enterprise

What You Should Know before Settling Credit Card Debt: Be Aware of Risks before Hiring a Company to Handle Negotiations

Article excerpt

MANY CONSUMERS HAVE COME TO SEE DEBT SETTLEMENT as a quick fix when they're in a bind. BLACK ENTERPRISE recommends negotiating on your own, but if you absolutely must hire someone else to do it, you should know the risks involved. Federal Trade Commission rules that went into effect in September and October require businesses to disclose these risks before consumers consent to hire their services.

Understand what you're getting into.

Debt settlement is an agreement a creditor makes to settle for less than the full amount due. The settlement company acts as a middleman to help you get out of a debt you can no longer pay. "Debt settlement companies help consumers negotiate their debts so they can pay them off for less than they owe and avoid bankruptcy," says Gerri Detweiler, a personal finance expert at Credit.com, a credit education website. However, this arrangement results in a negative mark on your credit report. Detweiler also notes that there's a chance that a creditor could sue to get full payment, a disclosure that settlement companies now must make when debtors seek their services.

Know the effect the arrangement will have on your credit score.

These companies have to tell you that debt settlement will hurt your score; it could drop by as much as 150 points. The settled debt will stay on your report for about seven years. "The impact of debt settlement on your credit score is severe," Detweiler says.

"First of all, you're going to fall behind on your bills [because many companies tell debtors to stop paying], and second, when you do settle your debt it's typically reported to the credit reporting agencies as settled for less than the full balance or it may reach the status of charge off, which is where it's written off the creditors' books as a bad debt. …

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