Debt settlement: what you need to know

Todd Ossenfort: I’m Todd Ossenfort, Chief Operating Officer for Pioneer Credit Counseling. I write a weekly column called The Credit Guy for CreditCards.com.

Paying a percentage of what you owe to a creditor rather than the full amount is called a debt settlement. Many, many companies offer debt settlement services which include collecting an affordable monthly payment from you along with an enrollment fee. Typically, the settlement companies will hold your payment for three to six months and then negotiate with your creditor on your behalf to settle your account. Keep in mind that while the company is holding your payments, no payment is being made to your creditor and the non-payment is being reported to the credit bureaus. The longer your payments are held by the company to force settlement, the more damage is done to your credit rating.

In addition, while payments are being collected by the debt settlement companies, you will continue to receive collection calls from the creditors wanting payment. Once your account has been settled, it will be reported to the credit bureaus as paid, but not paid as agreed, which is what potential lenders want to see on your accounts. Debt settlement is a legitimate avenue for paying debt. It does, however, cause quite a bit of damage to your credit report.

Before choosing a debt settlement company, be sure the company is accredited by the Association of Settlement Companies; has certified debt arbitrators; has reasonable fees; has a service guarantee; discloses what is included in your debt settlement program; is a member of the Better Business Bureau, the Chamber of Commerce; and is licensed and bonded in your state, if they require it.

This is The Credit Guy, Todd Ossenfort. Take care of your credit.

A credit counselor discusses what debt settlement is and how it can help or hurt you.