It’s anyone’s dream to stop paying creditors for the debts they incur. The happiness in having that financial freedom to do whatever one pleases is one of those feelings that borrowers want.

Borrowers will want to do anything they can just to even reduce their payment to their creditors. In today’s fast growing world, a simple click can lead to debtors seeing ads that go like “Reduce your debt up to 50%!” or something juicier like “Wanna be out of debt in less than 6-8 months?”

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Of course, the temptation is real, and a lot of desperate people click those ads. They foolishly jump in without knowing what they’re getting in. In reality, individuals who go with these ads are dealing with a debt settlement company, while the deal they’re getting into is called a debt settlement.

Debt settlement for some might be considered an alternative to bankruptcy. Before anyone else jumps the gun and goes for it, people should know what exactly is debt settlement. Here are some important details to know.

How debt settlement works

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Debt settlement companies collect important details such as the names of the creditors that a person owes, the amount, and any other existing agreement that the enterprise should know. The firm then gives estimates, and a new lower monthly payment is in agreement.

The company will then advise people to stop paying creditors and instead send the payments to the firm. Debt settlement starts when payments begin to appear in a savings account. When the amount reaches a particular point, the company then calls creditors to inform them of this and starts creating agreements to be negotiated.

When the lender agrees to the terms and conditions, the settlement company then makes payments to them and starts building settlement fees. These charges depend on a certain percentage of the original debt or are sometimes in fixed amounts.

In plain view, debt settlement may be a good option for those who don’t want to go into bankruptcy. Here lie the dangers. Those long months of non-payment or instances of delinquencies by the borrower get reported to credit bureaus.

These warnings or bad scores remain on a person’s record for up to 7 years. In the instance that a debt company settles the debt, the bad records aren’t removed from the record but instead become marked with “Paid-Settled,” which is still considered a bad mark.

Having bad marks often result in a person getting denied by banks and lenders for any requests applied. Even applying for credit cards becomes impossible. In worst case scenarios, even applying for jobs and health care benefits are affected.

Alternatives

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If a person wants to maintain a good credit score and is only late by 1 or 2 months in payments, then debt settlement should not be considered an option. In any case, borrowers should talk with their creditors to settle on any agreements that they have. Creditors often have hardship programs for creditors who have difficulty in paying debts on time.

Takeaway

Although debt settlement may sound like a good option for some, it should become the last resort. The payoffs are great, but the downsides are greater. Surely debts can be canceled, but to sacrifice a good credit score is too much.

That credit score can be the saving grace for an aspiring business owner to restart a business. If that becomes sacrificed, then all hopes can be lost for a planned rebirth of a venture. Instead of opting for a “Magic Bullet” that doesn’t entirely solve problems, look for alternatives such as talking to a creditor.

These creditors can have hardship programs that may be suitable for people who want to maintain a good credit score for future endeavors.