Debt settlement or debt negotiation is a relatively new way to get out of debt. It involves talking to your creditors about lowering the amount you owe, usually by as much as 50–60%. A creditor will only be interested in a settlement offer if a consumer is behind on their payments. This is because, according to statistics, a person who owes money but hasn't paid is much more likely to 1) file for bankruptcy, 2) never pay the creditor at all, or 3) cost the creditor so much money in collection efforts that an offer to settle is better for the creditor. The financial benefit of debt settlement is clear: you can cut your debt in half and, most likely, get rid of all interest. Since you have to be behind on payments for a settlement to be reached, your credit will probably take a hit.
Consumers with Good Credit and Debt Settlement: It should have a pretty big effect, especially in the short term. But if you have a lot of debt, even a good credit history can't make up for how much you owe. Since this is the case, you should also think about 1) when you might need to use your credit again and 2) what other options you have. If you're retired and don't want to get another mortgage, debt settlement is probably still your best choice. If you're 30 and want to buy a house in the next year or two, you might want to think again. And by "reconsider," I mean that I would think again about paying off my debt and buying a house. If you can barely make your minimum payments, the last thing you should do is take on more debt. If you don't have any real assets, like equity in your home, debt settlement may be a good option for you because you don't have any other choices that won't hurt your credit. On the other hand, if you have a lot of equity in your home, it may be best to use it because the effect of debt settlement on your credit may cost you more in the long run if you try to refinance or buy another home.
Consumers with Average Credit and Debt Settlement: Debt settlement will still hurt you a lot in the short term, but people with average credit will be able to get their score back to where it was before they joined the programme much faster than people with good credit. Keep in mind that if you're the type of consumer who has always made payments on time but still has a low credit score, debt settlement may help you in the long run by getting rid of the debt that is dragging down the amount owed part of your credit score. After you finish your debt settlement programme, you should be in a better position to get a loan if you take some steps to improve your credit score.
Debt Settlement and People with Bad Credit: For those of us with bad credit (600 FICO score or less), debt settlement may still have a negative effect in the short term, but the effect on our credit will be so small that the money we save by not paying interest on high-interest credit cards will probably make up for it. Also, if your accounts are already in collections or have been written off, debt settlement may help your credit score because you'll be paying off accounts that are very far behind. If this sounds like you, debt settlement is a great option.