What is a Debt Settlement?
A debt settlement plan involves a debt settlement company negotiating with your creditors to reduce your debts. The plan does not involve you making any principal or interest payments to your creditors. Instead, you will make monthly payments to the debt settlement company to build up a lump sum payment in a holding account, which can take several months. Once the company feels it has enough money built up in the account, it will contact your creditors to try to settle each of your debts for less than what you owe. Although it looks appealing, your credit profile can be negatively impacted. You should remember that debt settlement is not a solution to pay your entire debts – it is only reducing your amount of the debt. If you do a little "homework," there is nothing they can do for you that you cannot do for yourself.
Know your consumer rights
- You cannot be charged any fees unless your creditors accept the offer of a settlement of your debt.
- You have the right to cancel this contract within 10 days after receiving a written copy of it and you do not need a reason to cancel. To cancel:
- Tell the company in writing (i.e., by letter delivered in person, by email, registered mail, prepaid courier or fax).
- Keep a copy of the written cancellation notice to provide proof of the date you gave your notice.
What to consider before you sign the contract
- Renegotiating your debts, including using these services, may lower your credit rating or credit score. Your credit rating is used by lenders and creditors, insurance companies, landlords and potential employers to assess applications for items such as loans, lines of credit, credit cards, insurance, apartment rentals and employment.
- Your interest rates may increase during the time that your debt remains unpaid. This may increase the amount you have to pay back to your creditors.
- Your creditors may not agree to a settlement.