Debt Settlement Services: What They Don't Disclose (and Why It Matters)

Many borrowers think a debt settlement service company is always acting in their best interest. Debt settlement service companies are still lenders like all of the other lenders you have worked with. Debt settlement companies market their services as if they are unlike other lenders, but they are still looking to make a profit by extending you financing and charging you fees. Your debt settlement company may be hiding key information from you in order to attract your business.

#1 Bankruptcy may be a Better Option

Debt settlement companies routinely tell customers they are the solution to bankruptcy concerns. What they neglect to tell customers, though, is that bankruptcy is not always such a bad choice. If you qualify for bankruptcy, it offers legal protections debt settlement does not.

For example, a bankruptcy court can typically negotiate much lower settlements on your loans. If you have experienced a financial hardship, a bankruptcy court can even excuse you of some of your debts. Ultimately, you will have no ongoing obligation to meet the debts after your bankruptcy is complete.

#2 Settlement does not mean Forgiveness

Forgiveness of loans is removal of the obligation to pay them. Forgiveness is rarely given on the entire sum of a loan, but part of a debt may be forgiven. For example, some federal student loans may be forgiven if a borrower serves in the military, becomes disabled or experiences a number of other unique situations. When you settle a debt, the sum is not actually forgiven. On your credit report, the lender will show you did not meet your obligation in full when you repaid the debt. This can reflect poorly on your credit history for years in the future. When you enter credit settlement, you should be prepared to see your credit score drop substantially.

#3 Settlement Rarely Reduces Principal Debt

Settlement companies are effective at lowering the total sum you owe a lender. However, they mostly eliminate interest payments and finance charges from bad debt. They rarely actually negotiate a loan down below the principal sum. This means you will still have to cover the cost of the majority of the debt burden. Settlement companies disguise this by showing they have reduced your payoff quote. The payoff quote typically includes a number of penalties, though, that make it far larger than the sum you actually would owe if you paid the debt in full. Remember to consider the principal owed when you are reviewing a settlement quote.

#4 You May Pay More

It can be hard to understand the total cost of a settlement program from the get go. Settlement companies may not disclose their fees in one round number. Instead, they may ask for monthly service charges, interest and other small fees along the way. When a debt settlement company does disclose the full amount it will charge you for the loan, you may be surprised to see the amount is larger than you would pay by allowing the loans to mature at their current rates. Only settle if you can determine the cost is less or if you have no other option to avoid default.