A debt settlement plan involves a debt settlement company negotiating with your creditors to try to reduce your debts. A typical debt settlement program requires you to make monthly payments to the debt settlement company to build up a lump sum payment in a holding account. 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. You should remember that there is no guarantee that the debt settlement company can resolve your debt for significantly less, as some creditors will not negotiate with debt settlement companies.
Although it looks appealing, your credit profile can be negatively impacted. By making payments to the debt settlement company your credit report may show several months of “non-payment.”
What to consider before you sign a contract with a debt settlement agency
Consider other ways you could pay off your debts, such as negotiating a repayment plan with your creditors on your own.
Renegotiating your debts, including using these services, may lower your credit rating or credit score.
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 any settlement.
Know your rights
You cannot be charged any fees by the debt settlement agency unless your creditors accept the offer of a settlement of your debt. You have the right to cancel a 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 (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