When you’re drowning in debt and struggling to keep your head above water, you might consider using a debt settlement company. Many debt settlement companies offer guarantees and promises that sound really great when you’re desperate to pay your bills. However, these companies aren’t always able to fulfill their promises. As the saying goes, “if something sounds too good to be true, it probably is.”
In this article, we explain what a debt settlement company is, what it can do, and important warning signs to look out for. We also provide some alternative debt relief options to working with a debt settlement company.
What is a Debt Settlement Company?
Debt settlement companies are companies that will negotiate the terms of your unsecured debt with your creditors on your behalf. The practice of debt settlement is referred to by many names, including:
- Debt relief
- Debt reduction
- Debt consolidation
- Debt arbitration
- Debt negotiation
- Debt pooling
- Debt elimination
How does debt settlement work?
Typically, a debt settlement company will offer your creditors a lump sum of money in exchange for the elimination of your debt. For instance, if you owe $10,000 on a credit card, the debt settlement company might offer to pay $5,000 as a lump sum if the creditor forgives the remaining $5,000 of debt.
If your creditors agree to accept your lump sum offer, you have to hand over the money to the debt settlement company, and they will pay your creditors.
There are some things to consider before working with a debt settlement company. One is that your creditors are not obligated to negotiate with the company. It is completely their decision if they want to engage. Even if your creditors refuse to negotiate with the debt settlement company, you might still have to pay the company a fee. This means you’re in a worse position than when you started. You’re still on the hook to pay your debts, and you have to pay the debt settlement company a fee for no result.
Another thing to think about is whether you can come up with a lump sum amount of money required for the settlement. Often when you can’t afford to pay your bills, you don’t have extra money ready and available for a lump sum payment.
Warning Signs to Watch For
Before working with a debt settlement company, it’s important to do your research and watch out for the following warning signs.
- High-pressure sales tactics. A debt settlement company might use high-pressure tactics to get you to agree to work with them. Don’t let them pressure you into making a decision right away. Take your time and make sure you fully understand what is going on before agreeing to anything.
- Promises that are too good to be true. Some debt settlement companies might make promises they can’t execute. For instance, guaranteeing they can significantly reduce your debts. In reality, they can’t even promise that your creditors will agree to negotiate with them.
- High fees. Before you work with a debt settlement company, ask about their fees. Do you have to pay any money upfront to work with them? What happens if they aren’t successful in negotiating with your creditors? Will you still have to pay a fee?
- Customer complaints. Research what previous customers have to say about the company. You can look at comments on the Better Business Bureau or check in with your province or territories consumer affairs office.
Alternative Options to Debt Settlement
If your debt is becoming unmanageable and you need help figuring out a plan forward, debt settlement is not your only option. You can also consider:
Negotiating on your own
You don’t need to hire a debt settlement company to negotiate with your creditors. If you feel comfortable negotiating on your own, you can. You can work directly with your creditors to try and reduce the amount you owe, reduce your interest rate, or reduce your monthly payments so they are more manageable.
Get credit counselling
You can work with a Licensed Insolvency Trustee to get counselling and improve your financial, knowledge and skills. For instance, with credit counselling you can learn how to create and stick to a budget.
Filing a Consumer Proposal
If getting better at budgeting isn’t enough to help you pay off your debts, and you’re looking for extra relief, you can also consider filing a Consumer Proposal. In this process, you work with an LIT to develop an offer to pay your creditors a percentage of your debt, extend the time you have to pay your debts, or both. The maximum amount of time you can take to repay your debt in a proposal is five years.
Filing for Bankruptcy
Another option is to file for Bankruptcy. While the idea of Bankruptcy is scary and embarrassing for many people, it can provide a financial fresh start for those who are really struggling. In Bankruptcy, you can be discharged from most of your unsecured debts.
We Are Here to Help
If you’re worried about your debt and considering a debt settlement company, reach out to a Licensed Insolvency Trustee first. We can help you determine the best path forward. Whether you can benefit from credit counselling, a Consumer Proposal, or Bankruptcy, an LIT is qualified to help you make this decision. You don’t have to navigate your debt alone. Reach out to one of our experts today for a 30-minute risk-free call at 1-888-371-8900 or contact us online.
