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Expenses like medical bills, student loans and mortgage payments can create what feels like an overwhelming amount of debt. So, looking for the quickest method of relief is natural.

A debt settlement is an enticing option, because it’s an agreement you make with your debt collector to pay off a percentage of what you owe. It can be a successful way to get you out of the hole quickly.

Without knowing the full details, however, a debt settlement could leave you in a worse spot than you were initially. Let’s take a look at what to watch out for when coming to terms with your debt.

Debt settlement companies

Discussing a payment plan directly with your debt collectors may seem like a daunting task, so debt settlement companies will offer their services as your third-party negotiator. You may reach out to one of these companies yourself, but it’s probable that they’ll contact you if you start falling behind on payments.

Debt relief companies are an attractive option to help you to establish a lessened payment structure for your debt. But the added fees for their services, along with some other associated risks shouldn’t be ignored.

For starters, there’s no certainty that a debt settlement company will be able to find you a money-saving solution. There are many cases where they’ll want to handle the entirety of the communication with the debt collectors, freeing you from any stressful conversation.

However, this is not in your best interest. If you’re cut out of the communication, you’re left unaware of how your money is being handled. Some settlement companies may even withhold payments to debt collectors until they’ve collected their own fees, thus leaving you responsible for missed payments, late fees and added interest.

Worst case scenario – your settlement offer may not even be accepted, leaving you with more fees, a depleted credit score and even more debt.

Read the fine print carefully when considering an agreement with a debt relief company, and don’t let anything happen with your money without your knowledge.

Planning your debt settlement

By working on the settlement with a lawyer or by yourself, you can avoid the costs and potential shady business practices you incur with a debt relief company.

Debt collectors are more likely to accept a one-time payment in order to avoid the risk of not collecting any of what they’re owed. Accumulate as much cash as you can to make a substantial lump-sum offer to have your full debt amount forgiven. If you are able to come to an agreement, request that your debt collector provide you with a letter confirming your debt will be forgiven for paying the decided amount.

With any debt settlement decision, it’s vital to consider that you may owe taxes on your forgiven debt, and your credit score will take a hit due to your debt being “settled” rather than “paid in full”.

Other debt relief options

There are a few different ways to relieve debt. For larger amounts, unfortunately those options are typically limited to two: a debt settlement or filing for bankruptcy.

If you’re not able to make a realistic lump-sum offer or find a reasonable payment plan, bankruptcy can sometimes be the only choice. Even so, a poorly constructed debt settlement can be even more painful. Both solutions will cause setbacks, but if you’re able to do your homework and find yourself a great debt settlement — it’s preferred. While a reasonable debt settlement will also decrease your credit score, bankruptcy will undoubtedly hurt your creditworthiness for years to come.

For moderate amounts of debt, you may want to take a look at credit counseling services. These entities work alongside you and your debt collector to set a budget and negotiate a customer-friendly interest rate. Your credit score will still take a hit with this option as well, but it will lessen the monetary blow and provide more clarity than a debt settlement would.

With small debt amounts or several small debts that need consolidating, a balance transfer credit card can give you a way to get out of debt.

Bottom line

The straightest path toward tackling your debt is by way of setting up your own debt payment plan. It’s not always easy, but a manageable payment schedule means manageable debt. In addition, continued discipline, research and willingness to explore your options will ensure the path you take to financial freedom is the right one.