Settling Your Credit Card Debts
From GreenPath Debt Solutions

You may have heard advertisements from debt settlement companies who promise to reduce — or even erase — your debt for pennies on the dollar. If you find yourself sinking deeper in debt, this may sound like the answer to your problem. But before you decide, there are many things to consider on ways you can get out of the red, without spending a whole lot of green.

Debt Settlement Companies

Debt settlement companies claim to help people with debt problems. They say they’ll negotiate with your creditors to reduce the amount you owe. Some claim that they can arrange for your debt to be paid off for less than the amount you owe – for anywhere from 30 to 70 percent of the balance. For example, if you owe $10,000 on a credit card, a debt settlement company may claim it can arrange for you to pay off the debt for less, say $4,000.

But there is no guarantee that debt settlement companies can persuade a credit card company to accept partial payment of a legitimate debt. Even if they can, you must put aside money for your creditors each month. Meanwhile, it may be months — or even years — before the debt settlement company negotiates with your credit card company to settle your debts. And, if you stop making your payments in the meantime, the credit card company usually adds late fees and interest to the debt each month. Such actions can cause your original debt to double or triple. Then, if any debt is actually settled, you will likely owe income taxes to the IRS on the forgiven amount.

Credit Counseling Agencies

Reputable, non-profit credit counseling companies will be affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.

The credit counseling process begins with a free financial assessment. Your counselor will gain an understanding of your situation and goals, and will then work with you to create a detailed budget of income and expenses. The counselor will review the various options that are available to you to address your debt and provide you with an action plan to move forward.

A non-profit credit counseling company may offer to enroll you in a debt management program (DMP). A DMP can lower your interest rates, eliminate late and over limit fees, and stop collection calls. With a DMP, you make payments to the counseling agency and the agency then pays your creditors on your behalf. A reputable credit counseling company should never try to push you immediately into a DMP.

Consider All Your Options

It’s critical that you consider all the options available to you. Debt settlement is best for a very small segment of people — potentially those who have charged off debt and/or those who have received or are expecting to receive a lump sum of money. A DMP is an appropriate option for a greater percentage of consumers. Others may be able to handle their debts on their own with some counseling and education. And, for some consumers, bankruptcy may be appropriate. Remember, a company with only one product or service usually has a vested interest to sell you that product or service without operating in your best interest. A better option might be to work with someone who will help you determine the best option for you.

Source: Federal Trade Commission