Over the past five years debt settlement has been growing quite popular as a method to become debt free. It's no wonder, with more and more consumers racking up thousands of dollars in debt. Each year we as a country hit new highs when it comes to consumers racking up personal debt. While debt settlement may be a very good option for many people, the individual must understand what it is and what it takes to complete this process. If you're thinking about signing up with one of the many debt settlement services out there, there are five things you really need to consider.

1. Understanding the Basics. What is Debt Settlement?

First, what is debt settlement? Debt settlement is the process in which a reduced amount of your balance is agreed upon to be paid, instead of paying back the entire amount. For the creditors to be willing to offer someone any kind of settlement the account must be in default, meaning if you are current right now you do have to fall behind if you are looking to reach a settlement agreement. Debt settlement is not about your creditors writing off your debt without you paying another penny. With debt settlement, you do have to pay a one-time lump sum and in exchange for this amount of money, your credit card company reports your debt as being paid in full.

So what is it you are going to have to pay back? This all depends on the amount of debt and your personal financial situation, meaning your income and budget. In most instances, the amount of a debt settlement is somewhere between 30 and 80 percent of the original amount of the debt.

If your debt is $3,000 you can expect to pay somewhere between $900 and $2,400 in a credit card debt settlement. That isn't, however, set in stone. In rare instances a settlement can be as little as 10 percent of the balance or as much as 85 percent.

2. Oh Wow Sounds Great! But Hold On

By now you might be thinking this sounds great. I mean, who in their right mind wouldn’t want to pay back a portion of what they owe? Unfortunately, it's not always as easy as some debt settlement companies make it out to be.
First off a debt settlement service cannot guarantee any results until after they have the settlement in writing from your creditors. In fact, some debtors don't even qualify for credit card debt settlement. If the debt analyst of the company you speak with doesn’t analyze your situation by reviewing your actual statements during the consultation to see if you qualify as a candidate and just promises you he/she can help you out and pressures you to sign up, then hang up.

A legitimate debt settlement service will be up front about the fact that they cannot guarantee what the results of the settlement will be, they won't be able to quote you any firm numbers until they have negotiated on your behalf. They can give you a pretty accurate estimation, based on previous settlement arrangements made with that creditor, but nothing is set in stone until after the negotiation has been made.

3. Your Credit Score

Debt settlement will effect your credit in some way. For people who are current initially this process will effect your credit negatively, however once you get to the point of actually settling your debts you will see your score go back up. That being said, if you have outstanding accounts in default with numerous late payments, debt settlement will actually help improve your credit score pretty much right from the beginning.

However you must understand your credit score is only a snapshot in time and will go back up. Fortunately, debt settlement is not made a record on your credit report, unlike credit counseling which is a record during the duration of the program and bankruptcy which is a public record for the rest of your life. Plus the inaccurate negative remarks you will receive on your credit report from settlement can be disputed and removed, which along with the fact your accounts now reflect a zero balance after the settlement will greatly increase your score. But, nevertheless more than likely you will experience a temporary reduction in your credit score.

4. This Does Require Money.

Before you get all excited about debt settlement, remember that the money has to come from somewhere. When you negotiate a credit card debt settlement, in most cases the credit card company is going to expect the amount you negotiate in full. However most settlement companies open some kind of a trust/escrow account for you to build up the necessary funds on a monthly basis in preparation for make the settlement.

While in most instances the amount that you will need to set aside each month will be lower than what you were paying the creditors to stay current, you really should make a point to save up as much money as possible as quickly as possible. You can save more money by getting the settlement wrapped up quickly. Once your account starts to go behind the creditors to tack on fees, and additional interest, so the longer it takes for you to arrange the settlement the more your bill will be. If a company tries to enroll you into a settlement program that is going to keep you in debt for longer than 3 years than do not do business with them, you really should look to have this all wrapped up within 2 years or less.

5. The Company’s Fee
When it comes to debt settlement services, you are going to pay a fee for the services they provide. Considering that most consumers can't negotiate a debt settlement, the fee will be well worth it. What you have to look at is the overall picture that you are going to be saving a large amount of money on what you owe.

That being said, if a debt settlement company asks you to send them the entire fee up front before they have actually settled your debt, don't fall for it. Unfortunately, there are some scams out there and when someone wants you to send them money without any guarantee on their part, it's usually a rip off. The company your dealing with should have at least a portion of their fee based on performance and savings after the account has been settled, thus ensuring that the person negotiating your accounts for you is always looking to get you the best possible deal.

While credit card debt settlement can be a bit time consuming, confusing and sometimes even stressful, it is a great alternative to bankruptcy. If you find yourself in the position of no longer being able to pay your bills, a credit card debt settlement may indeed be the solution you've been looking for. Settlement has been a savior for a lot of people and kept them from bankruptcy court. The big picture to look at with settlement is the fact that you are going to be saving yourself money, in most cases a pretty decent amount of money and you are going to get out of debt very quickly, especially when compared to how long it would take you to get out of debt with minimum payments and high interest.

Tags: debt settlement services, credit card debt settlement, credit repair, credit card debt, credit counseling