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Some risks associated with debt settlement

Settling your debt for less than you owe on a statement balance might be a way to get out of debt faster, but there are risks associated with such a strategy. Understanding those risks, and all your other options for debt relief, helps you make an educated decision and reduce the likelihood of finding yourself in a worse situation in the future.

One risk or disadvantage of many debt settlement programs is that you might lose some control over your own money. This risk is most often associated with programs that offer consolidation services. The consolidation service charges a fee -- sometimes small, sometimes large -- to manage your debt for you. They might work with the creditors to lower interest or settle for a lower payment, and in return, you deposit money each month to be distributed to these creditors.

The disadvantage with this type of program is that you don't have shuffle room with your own money should an emergency arise. You also might be paying a consolidation service when the creditor would have been willing to work directly with you for the same results.

Creditors also aren't required to settle debts. Since it isn't in the creditor's financial interest to do so, they might not be willing to budge much on what you owe. During a bankruptcy process, however, creditors often must accept discharge or settlement agreements through the court.

A consolidation program could also impact your credit score. This is true of many debt relief actions, including bankruptcy. However, with bankruptcy and other similar methods, impact to credit score is usually resolved in a specific amount of time.

Source: Federal Trade Commission, "Settling Credit Card Debt," accessed Oct. 09, 2015

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