I have been advised by a quite few well wishers about reducing my (then) $30,000 debt through a debt settlement firms. Most of the debt settlement firms suggest stopping payment to credit card bills for about four months and instead divert a monthly payment to another account. After 120 days of non-payment, banks are required by the federal law to write-off the debt (so that it can’t inflate their assets). For a fee, a debt settlement firm will negotiate a settlement with your creditors using your deposited money for lower amount than you owe.
The process of negotiating with creditors for a payment schedule at a lower interest rate and/or settled debt with (lump sum) with lower amount than the total balance is known as “debt settlement” or “debt negotiation” or “debt resolution”.
Sounds too good to be true! Indeed, since this will lower your credit scores because;
- The creditor will mark the account delinquent due to non-payment.
- Even after debt is settled, the credit report will show "settled for less than full balance" or "legally settled for less than full balance". This will remain on your credit report for 7½ years and further lower your credit scores.
- You will also be put on the creditor’s internal black list for life.
- There is also no 100% guarantee of a settlement. Creditor can get a legal judgment against you or sell/assign the debt to a collection agent. In that case, the creditor/agent has the right to collect the entire balance with interest.