Saturday, April 20, 2013

Is Credit Card Debt Settlement My Best Option?

Credit card debt has become something that many American households have simply been forced to live around. The recent financial recession has caused many people to lose their jobs, home and more. However, it seems as though the silver lining has finally made it's appearance around the dark cloud. More and more people are starting to find work and become financially stable again. However, overwhelming credit card debt has caused this to be a difficult task for many. 

During their fight for financial freedom, tons of consumers have happened across a debt settlement program. Promising savings of up to 55% off of principle balances, these programs tend to catch the eye of many consumers. But, are they the great, debt relief option that they are made out to be or, do credit card debt settlement programs have a dark side? Here is a detailed break down of how credit card debt settlement programs work. At the end, I will include a few tips to help you decide if credit card debt settlement is your best option! 

How Credit Card Debt Settlement Works, Step by Step 

Step #1: Creating A Payment Plan – When consumers first enroll into a credit card debt settlement program, a representative of the company will create a repayment plan based on the amount of debt the consumer has and their ability to pay that debt. Once the consumer agrees to the new payment plan, it's time for the real work to begin. 

Step #2: Set Up A Special Purpose Savings Account – Next, the debt settlement company will set up a special purpose savings account. This savings account will be the home for your monthly payments until you have saved enough money to settle a debt. 

Step #3: Inform Lenders Of Payment Arrangements – In most cases, the debt settlement company will inform the lenders in writing of the payment arrangements that they've made with you. However, the lender is under NO OBLIGATION to accept these payment plans! Also, even if they do accept the payment plan, there is nothing that stops them from selling your debt to a collections agency that doesn't accept the plan! 

Step #4: Settling The Debts One By One – As the money in your special purpose savings account accumulates to enough to pay off each debt entirely, the debt settlement company will contact the lender and negotiate a settlement. Because the lender has been waiting for an incredibly long time for payment at this point, they feel as though they must accept less now or nothing at all later. Therefore, they are likely to accept settlements of 55%, 45% and sometimes as low as 20% of the total amount owed. 

A Few Things That Should Help You Decide If Credit Card Debt Settlement Is Best 

#1. Credit Card Debt Settlement Will Harm Your Credit Score – Because lenders are not being paid on a consistent basis as agreed, these programs have an extremely adverse effect on credit scores. Therefore, if you are considering purchasing a home, car or anything else that requires credit, this may not be the best option for you. 

#2. You Give Up The Control Of Your Debts – While in these programs, you will often have to sign a power of attorney which gives the debt settlement company 100% control of your debts. Therefore, when you choose to use a debt settlement program, you will have no say in how your debts are managed. 

#3. Credit Card Debt Settlement Is A Last Resort Option – If you are considering credit card debt settlement as a last resort option before bankruptcy, you may be on the right track. Although this is not the best option for everyone, in extreme circumstances, extreme solutions are necessary. 

Resources That Should Help You 

How To Improve Your Credit Score – This guide is a great guide to use when you are going through credit card debt settlement. It will help you to quickly improve your credit scores once the settlement process is complete. 

Better Business Bureau – When looking for a debt settlement company to work with, it's always important to check the name with the BBB first. If the company has a grade that is less than a B+ or they are not listed with the BBB at all, chances are, they are not a company you want to work with! 

About The Author – Joshua Rodriguez

This article was written by Joshua Rodriguez, proud owner and founder of CNA Finance and avid personal finance writer. Join the discussion about this article or the personal finance topic of your choice on Google+!

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