Often times as I drive home from work I hear radio commercials claiming that they can help you pay off your credit card debt. It sounds great as they tell you that you can only pay half of what you owe. If you owe over $10,000 dollars in credit card debt then they can help you. Who would rather pay $10,000 dollars when they can pay $5,000 dollars right? However, can it be as good as it sounds?

The simple answer is no, it is not as good as at sounds. If a company tells you that they can reduce the balance of your credit card debt by half then that means you are probably looking at debt settlement. So what is debt settlement?

Credit card companies are not going to give up on money that you owe them. If you have spent $10,000 on a credit card do you really believe that the creditor is just going to say “No Problem, just give me $5,000 and we can call it a day.” No, they want all of the money that you spent. So, when you get involved with a debt settlement company what is it exactly that they do?

The first thing that happens is that they start by having you send in a payment to them. Many of the settlement companies take your first payment and keep it as part of their fees. They continue to take your monthly payments and they do nothing with it. They hold on to your funds while your cards go further and fuarther past due. They do this because it helps with the settlement process. A creditor is not going to take less then full value on a debt if you are paying it as agreed. Why would they allow you to give them half of what you owe when you are making the payment each month? This causes the credit card balances to go up even further than where they started. Not only is there no payment going towards the interest that is being charged, but now you are being charged late fees, and possibly over limit fees if the card was already maxed out. As soon as you go more than 30 days past due the creditors start reporting that your card is delinquent to the credit reporting agencies and your credit score starts to drop.

After several months of missed payments, the creditors are now getting nervous. They know that you might not pay them anything and they would rather get some of their money back then no payment at all. This is where the settlement company will start negotiating with the creditor. The creditor will settle on the debt for an amount less than what is owed. This does lead to another problem. At this point, you have only been making payments for several months and creditors accept settlements as lump sum payments. This means that you more than likely have only enough money to pay off one creditor. What happens to the other creditors?

The other cards will continue to go further and further delinquent. At some point, they will be sent to a collections agency. When this happens, it becomes another negative on your credit report. The process will start over with the next creditor as they continue to hold your funds until they have enough money to settle with the next creditor. The process will continue this cycle until eventually all of the debts are paid. Where does that leave you?

First, let us look at your credit score. All of your accounts will go delinquent. Since 35% of your credit score is based on how well you make you’re agreed upon payments, this portion of your score will drop significantly. Next, negative items on your credit report will stay on your credit report for 7 years. So once the account has been settled, it will reflect on your credit report for the next 7 years. This can severely affect your ability to get credit for the next seven years. If you are able to get credit extended to you, you are going to pay a lot more in the form of higher interest rates. One of the other negatives about settlement is the tax implications. Any amount that is forgiven above $600 dollars is considered earned income and you can be taxed on it. If you had a $10,000 debt that was settled for $5,000, then you will be taxed as earning $4,400 of additional income.

There are times when settlements may be an option that is worth pursuing. You as the consumer need to be aware of all of the implications of choosing debt settlement as a way to pay off your debt. The best policy is to pay your debt as agreed. If you are in a situation where you can no longer pay your credit card debt then look for help from non-profit organizations that can help you pay your debt while providing you with the education and knowledge to help you not get in this situation again.