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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Feb 25, 2021

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Summary

  • Debt settlement negotiations are often handled by third-party companies who promise to save you money and reduce your debt
  • Typically, after debt settlement negotiations, your debt is consolidated into one lump sum payment that is generally less than what you originally owed
  • While it sounds like a good deal, debt settlement can cost you more money in the long run and negatively affect your credit score

Debt settlement negotiations are aimed at reducing the amount of debt you owe by consolidating your debt into one lump sum. Generally, the lump sum is less than your original debt.

Debt settlement negotiations are often handled by third-party companies who work with your personal loan lenders to settle your debts.

Debt settlement negotiation services are most often used to handle credit card debts, but these services can be used to consolidate any debt.

Consumers should be careful when working with debt settlement negotiation companies. We understand how attractive the idea of consolidating your debt is, but in some cases, people may end up owing more money than they did before.

Plus, working with a debt settlement company could also have a negative impact on your credit score. This could keep you from getting a quality auto or home loan later on down the road.

Let’s explore debt settlement negotiations in more detail and see if these services are worth it for you. If you’re ready to compare debt settlement negotiation companies in your area, enter your ZIP code above.

How do debt settlement negotiations work?

A debt settlement company will negotiate on your behalf with your lenders. They will contact your lenders directly and work out terms for your debt relief.

In these cases, you may be advised to stop making payments to your creditors while negotiations are ongoing.

Generally, these companies try to negotiate for a lump-sum payment of your debt. You may be required to deposit money into a bank account administered by the company.

You will still have control over the money in this account, but it is set up as a way to save money while paying the lump-sum of your debt.

When your creditor and the debt settlement company reach an agreement, you must now agree to the new terms of the loan and make a payment of the debt.

Once this has all been cleared up, the debt settlement company begins charging you fees for their services.

Your lenders may not agree to debt consolidation. These third-party debt settlement negotiation companies cannot offer you a guarantee that they will be able to settle your debt.

If you’re struggling, you can read about other ways debtors recall their path out of financial peril.

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What are the benefits of credit card settlement?

The main benefit of debt settlement is being debt-free. The mental stress of being in debt can have a negative impact on your life. The National Institute of Health conducted a study into the effect of debt on people’s mental health.

Debt settlement negotiations can help you avoid going bankrupt, keep the creditors from harassing you night and day, and even lower your total debt amount.

While all of this sounds amazing, you need to be careful. There are risks to working with debt settlement negotiation companies, and you should be aware of them before you choose to work with one of these companies.

What are the risks of working with a debt settlement negotiation company?

It is very likely that your lender will not agree to negotiate with a debt relief company. This could land you in hot water if you follow the debt relief company’s instructions and stop making payments on your debt.

If your lender refuses to negotiate, you could end up with late fees and higher interest rates on the debt that you stopped paying back.

Plus, even if your debt settlement negotiation is successful, the debt that is forgiven could be considered taxable income by the IRS.

You can be charged fees by debt settlement companies even if only a portion of your debts have been settled. These companies are allowed to start charging you fees after they have settled a debt and you make a payment to your creditor.

If you have debts with five different lenders and the company settles one of these debts, they can start charging you fees.

Finally, your credit score can be seriously damaged. When you stop making payments on your debt, this could hurt your credit score. If no settlement is ever reached, you end up owing more money in fees, and your credit score takes a big hit.

Why would anyone work with one of these companies?

Do you know how to negotiate credit card debt? Most people don’t, and it can be a daunting task to negotiate with your lenders, especially when you are in debt.

Debt settlement companies offer people hope, and they can be effective. However, you need to make sure that you do your research before you choose to work with one of these companies.

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What kind of companies handle debt settlement negotiations?

There are many debt settlement negotiation companies out there. Companies like Merchants’ Credit Guide operate around the country offering debt relief services.

Before you choose to work with one of these companies, do your research and speak with a financial advisor to see if this is a good idea for your debt situation.

Debt Settlement Negotiations: The Bottom Line

Debt settlement could be a major lifeline to you and your family, but it is important to understand what you are getting involved in before you make a commitment that could negatively affect your credit score and fail to increase your debt.

While you can succeed at lowering your debt, there is no guarantee that debt settlement negotiation companies will be able to consolidate or lower your debt obligations.

If you’re ready to lower your credit card debt, enter your ZIP code below to compare debt settlement negotiation companies in your area.