By contrast, even with the “best” debt management companies, consumers pay high fees, wind up with serious blemishes on their credit files, and receive little to no financial education. Additionally, while many debt management firms “guarantee” their work, in reality they have no way to ensure that their questionable techniques and unorthodox negotiating methods will be effective. Read on to discover the downside to using the services of debt settlement companies – and why using a debt management company is far more advantageous.

The Hit to Your Credit Scores

The primary problem with debt settlement companies is that they typically advise you to stop paying your bills for a few months – sometimes for six months or more. At the end of that period, the debt settlement company goes to your creditors and tries to negotiate settlements on your behalf. The logic used by debt settlement firms is simple: They figure that after a few months of not getting paid, your creditors will be so eager to receive some money (instead of no money) that these creditors will gladly settle your debts for pennies on the dollar.

If only it were that easy.

The problem with this is strategy is two-fold. First, you wind up with serious black marks on your credit reports and you decimate your FICO credit scores. After all, just one late payment can drop your FICO credit score by 50 points or more. Imagine the damage done by being three to six months late on multiple accounts.

Plus, when debt settlement is “successful,” your creditors agree to accept less than the full amounts owed (even though they will consider the balance as paid). The creditors often then report to Equifax, Experian and TransUnion that your account was “Settled” or “Paid by Settlement” – which also tarnishes your credit records.

Does Debt Settlement Work – Or Backfire?

Additionally, there is no assurance that the methods used by debt settlement firms will work. Instead of caving in to a debt settlement company’s demands to let you pay, say, $30 for every $100 you actually owed, creditors may just decide to sue you, get a judgment against you, or garnish your wages.

The Better Method – Education and Reasonable Negotiations

Rather than use a debt settlement company, a better strategy is to first try to negotiate directly with your creditors. If your efforts fail, and you can’t keep up with your bills, then it’s time to enlist the help of a credit counseling agency/debt management firm. A good non-profit, HUD-certified credit counseling agency is the National Foundation for Debt Management (www.NFDM.org).

Debt management programs typically take three to five years to complete; most debt settlement programs usually take two to four years. Fortunately, enrolling in a debt management program, also known as a DMP, shouldn’t backfire on you – as long as you continue to pay your bills on time. When you enroll in a debt management program, your credit files do include a notation that you are participating in a DMP. However, taking part in a debt management program does not adversely impact your credit rating, nor is it a factor in how your FICO score is calculated, according to executives from Fair Isaac Corp., the creator of the FICO score. Your credit rating also doesn’t suffer because you are paying back everything you owed in a typical debt management program. The cost savings come primarily from having late fees eliminated, and interest rates lowered – two key factors in helping you become debt free fast.

Don’t Forget About Debt Settlement Fees…. And That Big Tax Bill

Obviously, costs vary for debt elimination programs. But $25 a month is a common monthly fee for many debt management programs. Most debt settlement companies charge you in one of two ways:

a flat fee, which often runs $1,000 or more, and is based on how much money the debt settlement “saves” you by negotiating with your creditors
a percentage fee, with fees of 15 to 20% of your total debt being typical
So for those with $10,000 in debt, fees would run about $1,500 to $2000 for a 3-year debt settlement program, compared with about $900 in fees for a typical 3-year debt management plan
Why Pay Thousands When You Are Already Thousands of Dollars in Debt?
Besides the fees cited above, it’s not uncommon for debt settlement firms to impose added monthly charges on their clients. These fees can be as low as $20 a month or as high $90 or $100 a month, depending on the company in question. Over time, therefore, consumers shell out several thousand dollars – on top of the initial fees charged – when they opt to go with a debt settlement firm.

The IRS’s Viewpoint on Debt Settlement

If you enter into a debt settlement plan, one final hazard to be aware of is that you will have to pay taxes on the amount of money you saved. For instance, if your debt was $10,000 and the settlement plan says you only have to pay $3,000, you will be required to pay taxes on the $7,000 you saved. If you are in the 25% tax bracket, you’ll have to fork over $1,750 to the IRS, because the government deems your $7,000 in savings as income.

Clearly, there are many pitfalls associated with debt settlement programs. As a result, most consumers battling credit card debt would be far better off seeking out the help and services of a reputable debt management firm.

Debt Management and debt counseling are two different programs, but can be confused as one. In this article, we will take a look at all three options, Management, debt counseling and debt settlement, Hopefully you can choose which solution fits your needs, we will also look at some of the pros and cons too.

Debt management is usually for people who have fallen a little bit behind and are having a hard time paying their bills and want to catch up. Management can also be for people who are not sure of how to manage their money. The decision of what bills to pay and where to cut back can be troublesome at times.

This is how debt management usually works. You hire a management company to take care of your finances for you and catch up on our late payments, in return you give them a big portion or all of your paycheck. They look at your expenses and decide which debts to allocate the money towards and how much.

The debt management company also takes into consideration what you need for living expenses. Pros, a good management company takes care of all the work for you and will assure your debts are paid on time. Not all management programs are bad, only believe a tenth of the bull you read on the web. Let me give you a good example. My ex-wife has to travel allot, at times she will be gone for up to 3 months. She has a debt management company take care of her finances for her, because she does not have the time. Sure they charge a small fee, but when she gets back, she can rest knowing all is well.

Cons, most debt management programs charge a fee and there are some bad debt management companies. Some debt management companies want you to use consolidation as a technique, this only works if your borrowing the same amount of money as you have debt, at a lower interest. A good debt management company will help you get out of debt, not create more.

Debt Counseling can be utilized for a few reasons. Most people don’t fall into this first category, but there are some individuals who just don’t know how to manage money. A good debt counseling program can teach someone how to manage their finances and get back on track.

Debt counseling can also be used for someone who’s fallen behind on their bills and just needs a good plan to get caught up. A good debt counseling advisor should be able to take your income compared to your debt and come up with a plan that will show you where you need to budget your money.

Pros, a good debt counseling program should not take that long to come up with a plan, less expensive.

Cons, there’s some bad debt counseling programs. be leery of one that wants to take to long making up a plan, unless your seeking counseling because you don’t know how to manage money.

Debt Settlement, negotiation, relief, or reduction the outcome is the same. This is where a person has to much debt and doesn’t have the monetary means to pay it off and is looking for creditors to relinquish some of their debt. Most people in this situation have fallen behind on their debts and have thought about filing bankruptcy. The good news is a lot of creditors are willing to work with you. The bad news is most people don’t know how to deal with creditors and end up hiring a debt settlement company.

Most debt settlement programs don’t work, they take to long to settle and charge outrageous fees. Some debt settlement programs can take 2 to 5 years and can charge up to 15 thousand or more in fees.Most creditors will not wait 2 to 5 years before taking action to collect. No matter what you’ve heard, the laws on bankruptcy have changed and most people will have to set up a payment plan with their credit debt companies.The only thing you can do is protect what credit you have left.

The great news is you can negotiate your own debt settlement and save a lot of m