The quick answer is: Yes! The whole goal of debt settlement to pay less than you owe and that is what all the debt settlement companies promise will happen.
The real question should be: A) How much less? B) How long is this going to take? C) Is there a price to be paid somewhere down the line?
The quick answer to those question is: Nobody knows for sure and yes, you will pay a price.
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Probably a heavy price.
If you believe the advertising spin that debt settlement companies use on TV and radio, it seems possible that you will “… pay back pennies on the dollar!”
That is possible, but so is the chance you bought the winning lottery ticket last Saturday night.
There is no documented data on how much of your debt you won’t have to pay. Experts say that if all goes well, you will be lucky to have 50% of your debt excused, but it could be (and often is) less than that.
As for how long the process takes, there is enough data to say that in most cases, it takes 36-48 months. Interest on the debt accrues during that time.
So, if you have a $20,000 credit card debt, for example, and were paying the average interest rate (in 2017) of 15%, your debt would grow to between $29,000 and $32,000 in 3-4 years.
So, if you owe $30,000 and a debt settlement company gets half forgiven, you only owe $15,000.
That might sound good, until you add on the additional charges and total up a final bill. Those charges include:
- A 25% fee for the amount of debt forgiven. If you owe $15,000 is forgiven, that means a fee of around $3,750.
- The IRS considers any forgiven debt as income, so if you had $15,000 forgiven, you’ll pay taxes on that amount. Estimated total: $5,000.
- Lenders will report debt settlements to the credit bureau agencies and it becomes a negative on your credit report for seven years. That lowers your credit score and raises the interest rate you will pay for future loans and credit cards.
So, when you add everything up after three years, the original debt of $20,000 could cost you about $23,750 to settle. That is $15,000 to the lender for settlement; $3,750 in fees to the company and $5,000 in taxes to the government.
(Read more: https://www.debt.org/settlement/