Before signing a debt settlement agreement with a company to negotiate your debts with your creditors, make sure that at the very least they have disclosed the following information to you. (Note: If they haven't voluntarily disclosed this information I suggest you look elsewhere)
Unlike a debt management program whereby the debt counselor makes payments to your creditors each month, a debt settlement firm makes no such payments. In fact, in order for this type of negotiation to be successful, it is typically necessary to stop paying your creditors if you have not already done so.
If you do not have money, have access to money (ie. loan from family member, line of credit from your home etc.) or the ability to save up money over time, then debt settlement is not for you. Most unsecured debts can be settled for 50 cents on the dollar or less, but you still need to come up with the money.
Most people who enter debt settlement programs save money each month that can eventually be put towards future settlements with their creditors. If you don't think that you can come up with the required funds, don't sign the debt settlement agreement.
Companies that provide debt negotiation services will charge you a fee. It should be made clear to you before you sign the debt settlement agreement the difference between funds paid for fees and funds that are put towards a savings program.
If you are told that entering a settlement program will protect you from your creditors in any way, you are being mislead. Creditors can continue to call you, write letters to you, hire collection agencies, sue you and attempt to garnish your wages if they gain a judgement against you.
The process of negotiating debt settlements has many variables. As such, no one can promise or guarantee an outcome when it comes to either the savings you will achieve or the time it will take. In fact this leads to the next disclosure that should come before you sign a debt settlement agreement...
Your creditors have absolutely no obligation to settle the debt that you owe them for anything less than 100% of what is wowed to them. It is up to you and your debt settlement company to convince them that it is in their best interest to negotiate, but they don't have to if they don't want to.
If you settle a debt and realize over $600 in savings, you may have to pay tax on that amount. Your creditor is obligated to report any savings over $600 to the IRS as Discharge Of Indebtedness Income. However, if you were insolvent at the time of the settlement you may not have to pay this tax. Check with an accountant with regards to your personal situation.
When you stop paying your creditors it will likely cost you in terms of both money (increased interest charges and penalties on your debt) and a reduction in your credit score. Knowing this you have to decide whether the potential benefits of the settlement program outweigh these costs.
Do not assume that all of your creditors will be contacted as soon as you sign the debt settlement agreement. When your creditors are actually contacted will depend on your situation. Therefore, it is very likely that your creditors will have no idea that you have entered a debt settlement program for many months and will continue to pursue you as usual.
If you do end up contacting several debt settlement companies I suggest that you use the above list as a checklist of sorts. See what each company volunteers in the way of disclosures. On top of that, ask very specific questions about anything you are unsure of and demand very specific answers.