Credit card debt is a major financial problem in the United States. Unfortunately, many consumers are not receiving the help they need and deserve because of a misunderstanding of how debt settlement works. Others are jumping into a debt settlement when there are other options available that are less damaging to their credit.
Don’t allow baseless debt settlement myths to limit your debt relief options.
Nobody/Everybody qualifies for a debt settlement
This is a tricky one because both variations of the myth are misleading and damaging to borrowers.
True. Not everyone is going to qualify for a credit card debt settlement. And even those who qualify for a debt settlement may not receive the pennies on the dollar reductions they would like. However, that doesn’t mean you can’t qualify for a substantial debt reduction. Get a free consultation with a professional debt settlement firms and ask whether a debt settlement is a good option for you. Debt relief experts can help you determine whether your financial situation qualifies you for a debt settlement.
These statistics illustrate the benefits of debt settlement programs. They are part of a 2015 study commissioned by the American Fair Credit Council that analyzed the outcomes of over 1.9 million consumer accounts enrolled in debt settlement programs between January 1, 2006, and March 31, 2015 (source).
- The average settlement of an account enrolled in a debt settlement program is 48% of the balance owed.
- Over half the consumer that enroll in a debt settlement program settle accounts within the first four months.
- Debt reduction consistently saved consumers between $2.75 and $3.13 for every $1 paid in fees over the life of a debt settlement program.
As you can see, there are many credit card users that are entitled to a fair debt settlement.
Only poor people apply for debt settlements
Credit card debt is a problem for all consumers but particularly for middle-class borrowers. After all, middle-class borrowers are more likely to have a credit card. Typically, they also have larger lines of credit than consumers in lower-income brackets. Federal regulations restrict credit card issuers from increasing the credit limit of an account unless they can determine the consumer has the income or assets to make minimum payments (source). According to the latest survey of consumer finances by the Federal Reserve, the average debt burden among members of the middle class — those with earnings within the middle three-fifths of the total population — is 122 percent of their annual income (source).
Negotiating for a debt settlement is unethical
Banks and credit card companies like to portray debt settlements as an unethical debt relief tool that shows a lack of character. That is unfair. Of course, there are people who use credit irresponsibly or even fraudulently, but most people who negotiate a debt settlement have fallen into difficult times because of circumstances outside of their control, such as medical bills, family problems, and unemployment.
If you are looking for someone to blame – and there is plenty of blame to go around – the credit industry and the legislative branch have a lot to answer for. There is a reason credit card use, and, therefore, debt exploded in the 1980s. Spoiler alert. It wasn’t the simply irresistible fashion industry. A 1978 ruling by the Supreme Court ended customer interest rate limits and the federal usury law. The deregulation of the industry allowed lenders to charge high interest rates and penalty fees that turned credit cards into cash cows for banks. Now, only nonprofit credit unions have an interest rate ceiling of 15 percent.
Debt consolidation loans, credit counseling, and debt settlements are all the same
The three main debt relief options for people with large debt problems: credit counseling, debt consolidation, and debt settlements. They are completely different from each other. They all have their pros and cons. A debt relief expert can help you determine which option is best for your financial circumstances.
Here is a brief summary of the pros and cons of each one:
- Credit counseling will probably protect your credit score, but you may end up extending the term of your loan and paying more in interest. Plus, its success rate is extremely low. Most people drop out before the debt is repaid.
- Debt consolidations require borrowers to either have excellent credit or to secure the loan with a home or another valuable asset. This method can reduce your monthly payments and protect your credit. However, it can also be expensive, take years to repay, and can put your home at risk.
- Debt settlement will have a negative effect on your credit and won’t necessarily stop collection actions while you’re enrolled in the program. However, it gives borrowers who can only afford minimum payments to get out of debt faster and save money on interest and fees.
Credit reports show the unpaid balance on debt settlements
You may have heard that delinquent accounts show on your credit report for up to 7 years. This is true. The credit report also shows the balance you owe, for lenders, employers, and landlords to see. The same CANNOT be said about debt settlements.
If a creditor agrees to a debt settlement, you no longer owe the remaining or “forgiven” balance. That is, after all, the whole point of a debt settlement: to provide people with overwhelming debt a clean slate. When lenders report the debt settlement to credit bureaus, the debt balance goes down to zero. Creditors may add a note along the lines of “settled for less than full balance.” Even the content of this note is up for negotiation during the settlement. Although there are no guarantees, you can request your creditor to omit it as part of your debt settlement negotiation.
Warning: There is a scenario where this myth does prove to be true. If as part of your debt settlement you agree to be liable for the deficiency balance, you will owe the difference between the full balance and the amount you pay as part of the offer in compromise. You should never agree to this. No reputable debt settlement company will ever allow you to agree to this. It is usually a trick debt collectors and unscrupulous creditors pull on people who negotiate their own debt settlement.
What should you do next?
Now you can debunk some of the worst debt settlement myths, find out what a debt settlement can do for you. Debt settlements are a powerful debt relief tool, but they are not a silver bullet for every financial problem.
If you are facing overwhelming debt and you can barely afford to make minimum payments on unsecured debts, such as credit card debt, medical bills, and personal loans, a debt settlement program may be a smart move for you.
First, read this guide on 10 questions you should ask a debt settlement company before you commit to a debt settlement program.
Once you’re ready, click here to get a free consultation with a debt relief expert. Educating yourself about your debt relief options won’t cost you a dime or hurt your credit score.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.