Here are some questions that I’ve received from readers about debt settlement. I’ve decided to publish them to help explain some of the aspect of debt settlement.

If you’ve got a question, feel free to ask it below and I’ll answer it the best I can.

From Lana in Cleveland:

I have a numerous accounts that I’m trying to pay-off. I have been given the option of settlements on most of my accounts. I did speak with one credit agency and they mentioned that when you settle it actually hurts your credit because it shows up as the settled amt paid off and not the entire amount. Also, how can I get the paid debts off of my credit report and showing paid in full?

Debt Settlement will reduce your credit score, but not permanently. It will rebound quickly if you are consistent in paying other credit accounts, like mortgages and car payments. What you’ll want to do is get a low limit credit card or a card for people with damaged credit. Here are a bunch of good ones that most people easily qualify for. You’ll re-establish your credit, and soon you’ll be back to where you were pre-settlement.

In fact you’ll have an even higher credit score in a shorter amount of time, because your debt will have been reduced dramatically.

Read the article on how debt settlement affects your credit score here: Debt Settlement and Your Credit Score

From Natalie B. in Vancouver, WA:

I owe more than $40,000 to my creditors, I don’t know how to pay off my debts and become debt free. Can anyone give me an advise?

First thing you need to do is commit yourself to no new debt. Cut up all credit cards except for 1 to use in emergencies.

Are you late on any of the payments? Do you have enough income to cover the minimum payments? How good is your credit score? Your approach depends on these answers, but I can tell you that if you’re behind on payments, you can negotiate settlements with your creditors for a substantial discount. You can try to do it yourself, or you can hire a good settlement company to do it for you.

You also need to immediately set up a budget and stick to it, spending only what you make, not a penny more, and putting as much toward your debt as possible.

From Scott in Portland, OR:

What is the typical fee for hiring a debt settlement company? I hope they’re not much, since I can even afford to pay my minimums?

It depends on the company. Most companies will charge a percentage of what you owe, generally anywhere between 15 to 30%. Some companies will take the first 3 payments into a savings plan as a “upfront” fee, then, upon settling a debt for you, they charge will also charge a percentage of the money you owed the creditor.

For example if you owed a creditor $4000 and settled for $1800, a 20% settlement fee would be $800.
Other companies will charge a smaller upfront fee, like $300, then collect a fee based on the amount you save by settling the debt. In the same example, if you owed a creditor $4000 and settled for $1800, a 20% settlement fee would be $440 (20% of $2200).

This is an example of performance-based fees and is a much better fee structure for because you obviously save more money, and it gives incentive to the company to negotiate lower on your behalf. Experienced and reputable companies will generally follow this payment model. Hoffman Brinker and Roberts is an example of a company that follows this model.

From Erick in Sanford, WA:

Will I get sued or will my paycheck be garnished?

Being sued is extremely rare when a person is enrolled in a settlement program.

Creditors are reluctant to file lawsuits and usually only sue when the amounts owed to them are high and there has been virtually no contact with the debtor.

The costs associated with a lawsuit are typically too high for what the creditor has to gain. With settlement programs, the settlement company is in contact with the creditor from the very beginning, informing them of your situation, your desire to pay and knows when the creditor is willing to accept a settlement agreement.

From Leah in Homestead, FL:

Debt settlement is morally wrong (I think). It feels like I’m would be cheating my creditors if I try to negotiate a settlement. Is this the right thing to do?

It’s OK to feel bad, but you must escape! Feeling guilty is a good sign. You are showing that you know that paying them back is the right thing to do. However, being a lifetime slave to to your creditors is much worse.

Your life will be ruined by your debt and you will never experience financial freedom until you free yourself. Using debt settlement is acknowledging that you made poor choices (or had poor circumstances), and asking for a break.

Almost every creditor will give you this “break” as long as they can recoup some of the money they loaned to you.

Things that might help you feel better: Creditors engage in predatory loaning practices that can deceive you into thinking that you can pay them back in a reasonable timeframe. In reality, they are setting you up for a lifetime of interest payments.

They don’t tell you this and they often change the rules (interest rates, terms) in the middle of the game. Remember, profit is at the center of their marketing campaigns, not your financial well-being. Yes, you need to be wise when you take a loan, but they can be very, very deceiving.