Unfortunately, many people have been facing severe financial hardships for some time. As a result of a spiraling economy and increasing expenses, many consumers have found themselves spending more and more money on their credit card accounts hoping that in some way, some time, the pressure would come to an end. Feeling as though the struggles of debt are overbearing, many people find themselves looking for debt relief options.

During the search for debt relief options, many Americans happen across a debt settlement program. After reading the description, debt settlement seems like a good idea. However, consumers tend to feel as though the process is too good to be true. “How can a company offer to settle my debts for pennies on the dollar without negative repercussions?” many people ask themselves. Well, in all honesty, negative repercussions are definitely in store when it comes to debt settlement. I believe that the problem here is that people are not properly educated on the process and tend to find themselves in situations that they never asked for! With that said, here is a detailed, TRUTHFUL explanation of how debt settlement works.

The first step in debt settlement is for the Americans to sign the paperwork allowing the debt settlement company to take over power of attorney of the accounts. This gives the debt settlement company the ability to speak on behalf of the people.

Once the contract is signed, consumers are asked to send payments directly to the debt settlement company. This is where the negative starts to happen. After taking a monthly fee, the debt settlement company will place the cash into a special purpose savings account. This means that the cash is not going to the lender that it was intended for at this time. Instead, the money from people is being stored in a special purpose savings account for months and sometimes years until there is enough cash to negotiate a settlement.

Once the consumers special purpose savings account has enough cash in it to start negotiating a settlement, the debt settlement company will start to negotiate with the banks. In most cases, these negotiations end in consumers paying pennies on the dollar for their debts and their debts will be paid off. Once debts are paid off, it shows on the credit scores that people have paid their debts at a settled amount. All done right? Well, no!

The reason the debt is able to be settled for such a low amount is, as the money was being saved in the special purpose account, the lenders were not being paid! After a few months, lenders started selling your debts to collections agencies and listing charge offs on the Americans credit reports. The debt collections company that purchased the debt purchased it for pennies on the dollar. So, when they collect, they are often willing to accept much less than the principal amount due!

The only problem here is that I’m sure you can see this process is devastating to credit scores! There are other ways of solving debt issues like debt consolidation, working directly with your lenders or even using balance transfer credit cards to reduce your interest rates. I would suggest using all other options before going with debt settlement!

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