A lot of people feeling the pressure and strain of being in deep in debt often turn to debt relief agencies, such as a debt settlement company, for help.

How does it work? What does a debt settlement company do to help you get out of debt?

Debt settlement takes place when a creditor agrees to write off a percentage of the total amount owed in exchange for a one-time lump sum payment.

In most cases, choosing to enlist the services of a debt settlement company is a wise decision as they are indeed capable of helping you out of a debt impasse. While debt settlement is not the only option to address a debt problem, for individuals or small businesses deep in debt with accounts that have gone into collection, it may be the most sensible option.

In these hard times, however, it pays to remember that you have to make financial or investment decisions with eyes wide open — you have to know what you’re getting into before you agree to hire the services of a debt settlement firm. It’s not all cozy in the debt relief industry — individuals and companies have been known to fall victim to scams and fraud perpetrated by the very companies they turned to for help.

Unfortunately, many people plunge in without even noticing the red flags. Here are a few things that you need to know to make an informed and financially safe choice.

What A Debt Settlement Company Does

When you work with a debt settlement company, you will need lump sum cash (if you have it) or arrange to gradually accumulate the amount in a ‘trust’ or escrow account that they will set up for you over a fixed period of time. Once enough cash is available or has been accumulated, the debt settlement firm will approach and negotiate with your creditor offering them a lump sum payment for say, 50 cents on the dollar. The deal is presumably attractive to any creditor especially if the debt has gone into collection because they are now assured of recovering 50% of the amount without any further hassle and expense.

The danger lies in the possible effect of your specific debt settlement arrangement on your credit and on the fees that will be charged by the company. Here are some things to look out for.

Things to consider

You’re making a big mistake if your debt account is current and you suddenly stop all payments to your creditor on the assumption that these will be taken care of by the debt settlement company while you make deposits to the ‘trust’ account. While this is true in alternative arrangements like debt consolidation, negotiation with your creditor will only start when there’s enough cash on the escrow account to entice the creditor to a settlement. If you stop payments and your account goes past due or on default, that could adversely impact your credit score.

Stopping payments and waiting for the negotiation to take place only makes sense if your account is already in collection and you’re dealing with a third-party collector (also called junk debt buyer). In any case, work closely with a reputable firm to find the most applicable solution and protect your interests during the settlement process.

Watch out for debt settlement services that ask you to pay exorbitant fees upfront. Some also take a monthly fee from your ‘trust’ account payments which poses a serious conflict of interest as they will now have the incentive to prolong the negotiation to continue receiving their fee.

Be wary of the debt settlement company that promises to help you avoid the payment by going around legal clauses. This is a blatant lie — even if the lawyers at your debt settlement agency manage to find a loophole in your credit agreement, all money owed must be still be repaid

Be careful when arranging for payments beyond the usual 36 months because few people can really sustain consistent payments that long and if you drop off the program, you could end up with a large expense (from the fees) without having accomplished anything at all.

Can a debt settlement company really help you get out of debt? Undoubtedly, yes. As with everything else as far as your financial transactions are concerned, proceed with caution and always be aware of what you’re getting into.

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