Debt Settlement Pros & Cons

Debt settlement companies specialize in helping overwhelmed consumers reduce the amount of their unsecured obligations such as credit card bills. Some require a lump sum upfront to make settlements, while others manage monthly payment plans for their clients. Debt settlement companies have a number of advantages and disadvantages that should be carefully considered.

Warning

Always check into the reputation of a debt settlement company before signing up, especially if they will be administering monthly payments on your behalf. Some companies have been accused of mishandling customer payments, thus causing more credit damage to the client.

Pro--Time Frame

Debt settlement companies can usually negotiate quickly with your unsecured creditors, and many repayment plans can be finished in 3 years or less. This of course depends on the amount of money owed and what can be paid toward these debts at once or each month.

Pro--Minimize Credit Report Damage

Debt settlement does cause some credit damage, though likely not as seriously as filing bankruptcy. Some accounts will be noted as "settled" and "closed by credit grantor," and many accounts will show that you had to undergo credit counseling.

Con--Monthly Fees

If you are part of a monthly payment debt settlement program, you may be charged around $20 a month as of 2009 depending on the company and your debt plan. In small debts, it may be better to add this money yourself toward repayment.

Con--Signup Fees

Most debt settlement programs require $100 or less upfront to enroll as of 2009. Again, with smaller debt loads it may be better to use this money toward the debt repayment and try to negotiate with creditors yourself.