Debt settlement is also known as debt arbitration or credit reduction. A debtor and a creditor negotiate and agree on an amount which will be less than the balance due but will be considered as payment in full. Debt settlement companies advertise that they dramatically reduce the amount you. Many consumers don’t really know how these companies operate and what exactly they do. Here are the top few myths about settlement companies.
Debt settlement will not hurt your credit.
The truth is, it will hurt your credit. It may ruin your credit for many years. Creditors do not negotiate debt settlement with borrowers who are current on their payments. Debt settlement companies collect your payments and put them in an escrow account to make your accounts severely delinquent. It may take six to nine months for creditors to agree to negotiate a settlement. At the same time, your credit score plummets to the all-time low, the balances are sky-rocketing due to late fees and high interest charges. The creditor may also sue you and garnish your wages. If you go through the process to the end, late payments, credit settlement, and wage garnishment will be reported in your credit file for up to seven years.
You don’t have to do anything once the debt settlement company takes over.
Actually, this isn’t true at all. The creditor has an agreement with the borrower, not the settlement company. They may even have a policy not to work with settlement companies. This means that they will not negotiate with their representative. If you fail to take their calls and respond to the letters as the representative advises you, the creditor will sue you and start collecting debt through garnishment. Another common practice for debt settlement companies is to mail a seize-and-desist letter to creditors. This letter orders the creditors and collectors to stop calling the debtor. This action usually angers the creditors and prompts them to take legal action against him.
Once the debt is settled, you don’t have to worry about it.
Unless you receive an official letter from the creditor stating the settlement amount, the payment received, and that your debt is paid in full, don’t assume that it has been settled. Creditors may agree to cancel your debt and then sell it to a collection company that will attempt to get the money from you. When a representative tells you that your debt is settled, ask for a letter from the creditor stating that.