A debt settlement agency that tries to convince a person with a good FICO score and a clean credit report to ruin their credit in order to reduce the amount of debt they owe, should be avoided. These type of debt relief companies clearly do not have their potential customer's best interests at heart.
If you are in debt and looking for a solution, you may have heard that a debt settlement plan is a potential answer to your debt problems. But keep in mind, debt negotiation/settlement plans are only appropriate for people facing extreme financial hardship. Usually debt settlement is a last resort before you would consider bankruptcy. And it is definitely not the best choice for someone who simply has a lot of debt, but has a good credit report and credit score, an income to pay off the debt over time, and is not behind on their payments.
Why would a debt settlement agency tell you to ruin your credit? Well, they won't come out and say that they want you to ruin your credit, but they will tell you to stop paying your creditors during the debt negotiation process. Of course, this will be disastrous to your FICO score and will put a huge black mark on your credit report.
If you are still a bit confused, that's alright. I'll back up for just a moment, explain quickly how the debt settlement process works, and it will likely become more clear to you.
The ultimate goal of debt negotiation is to get your creditor(s) to concede to allowing you to settle your debts with them for a huge discount. This discount can be as high as 70% in some cases. Based on this, it would appear that debt settlement is an attractive option for ridding yourself of debt.
But hold on, there's more.
Your creditors won't just "roll over" and take 30 cents on the
dollar for no reason. They have to be motivated to settle. So how do you
motivate them? The number one thing that motivates these creditors to
settle is the fear of getting nothing at all from you. If
they think that there is a chance that you will file bankruptcy,
leaving them out in the cold, then they will be motivated to
So the process of achieving that begins like this...
You stop making payments to your unsecured creditors. This gets their attention at the very least. But, as I pointed out earlier, your credit will be badly damaged by taking this route. Next, the debt settlement agency will contact your creditors and inform them that they will be negotiating a settlement of the outstanding debt on your behalf. While the negotiating process moves forward, your job will be to begin saving enough money so that when a settlement agreement is reached with one of your creditors, you will actually have the cash to pay it.
Depending on how many separate creditors you have, the process could take up to 36 months to complete. As the months roll by and your FICO score begins to look more like a good batting average (in the 300's), your creditors will become more motivated to settle. In a way it's a catch 22. The longer you hold out, the better the deal the debt settlement agency can negotiate for you, but the worse your credit gets.
Bottom line? Protect your credit at all costs if it is still in good shape. You will regret damaging your credit just to save some money on your debts. On the other hand, if you are already stopped making payments on your debts and your credit is in poor shape as a result, seeking the help of a debt settlement agency may be the right thing for you.
Here is what I recommend you do to help avoid being talked into a debt elimination program that is just not suited to your financial situation. First, find an agency that offers the three main types of debt relief programs. Credit counseling, debt management and debt settlement. A good one will offer a free assessment of your current financial situation, a budget analysis and a debt savings estimate. From there they will recommend which of the three programs they feel would suit you best.