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When something sounds too good to be true, it typically is. We hear from consumers regularly who state they are working with a debt settlement company who is going to cut their debt in half. That would be awesome if it were entirely true, right? There are many aftereffects of debt settlement we want to make sure all consumers are aware of so you can make the best decision for you.

The debt settlement company does not do this for free. While there are some non-profits who work with consumers for free, such as credit counseling agencies or the certified financial counselors at FCCU, the majority of debt consolidation companies charge a fee. Most financial institutions will refer you to non-profit credit counseling agencies. However, if you are receiving marketing pieces from a “credit counselor”, this is typically a for profit debt settlement company- proceed with caution.

Debt consolidation companies will ask you to sign an agreement that will usually last two to three years (sometimes up to five). Once you have signed the agreement with the debt settlement company, you have typically agreed to pay them a percentage of the debt they settle for you. This fee is usually 20-25% of the settlement, so if they negotiate a settlement of $10,000 less than what you really owe, you could owe them $2,500 in fees.

There are other areas of concern to consider:

• The lenders/financial institutions may refuse to settle and some refuse to work with debt settlement companies altogether.
• Most debt settlement companies will ask you not to make payments while they work to settle your debts. This will have a negative impact on your credit score and could cause you to incur late fees, higher interest rates, and additional penalties. When you compound this over two to three years, you can see how this will have a huge impact on your credit score. It may take up to seven years to restore your credit.
• Most lenders will only settle if you provide a lump sum payment. Are you in the financial position to give thousands of dollars to settle?
• The amount forgiven or settled could be considered income by the IRS and this may cause significant tax consequences for you.

What are your options:

While working with a debt settlement company is certainly an option, you also want to be aware of the alternatives. Anytime you may be struggling to make your payments, please remember we always encourage consumers to reach out to the financial institution before they fall behind on their payments. Before you fall behind on payments, we have a lot of tools to assist you with,  but after you fall behind, our tools are limited.

If you haven’t fallen behind on your payments, we may be able to provide a deferral where we move your next payment to the end of your loan giving you time to catch up. We may also be able to refinance your loan. Refinancing will lower your payment, and sometimes even your interest rate, but may lead to it taking longer to pay off. If you own a home, we may be able to use the equity in your home to provide a debt consolidation loan, which would allow you to pay off high interest rate credit cards and other loans to a more affordable payment and often with a lower interest rate.

There are times, where we aren’t able to find a good solution through the lending tools we have and will then have you work with our certified financial counselors at FCCU to build out a debt management plan to payoff your high interest rate debts and eventually improve your credit score and financial position.

As a consumer, you have many options available to you. It is important you talk to a trusted financial partner before signing any agreements, so you move forward knowing all your available options. Please never hesitate to call us and chat. And vice versa, please don’t hesitate to pick up our call. It is easier for us to help if we are knowledgeable about your circumstances. We realize life isn’t always easier, especially now, we are here to help.