If you are burdened with financial obligations, a debt settlement company may sound like an attractive option. However, such businesses can lead to more problems than you bargain for.

How They Work
A debt settlement is when a creditor agrees to accept less than the total amount owed. A company that specializes in arranging settlements may promise to cut your debt by half or more. They work by requiring you to stop paying your creditors and deposit money into their specially designated savings account instead. Once you’ve built enough funds, they offer a lump-sum payment to one of your creditors – and then move on to the next.

Many of these companies make such dicey claims as:

• Having privileged relationships with creditors, and the ability to secure a better deal than you can.
• Your financial troubles will be over in a matter of months.
• Using their service preserves or improves your credit score.
• You can’t be sued for nonpayment.

What Can Happen
In truth, debt settlement companies don’t have special creditor associations, and the deals they arrange are no better than what you can negotiate. Other problems include:

• Credit report damage. For current accounts, creditors will report late payments to the credit bureaus, resulting in a negative credit rating. Also, settled accounts are perceived as worse than accounts paid in full. 
• Collection activity. While you aren’t paying, you’ll get aggressive collection calls and letters from creditors.
• Fees. The cost to settle is typically 15 to 20 percent of the original debt – or $1,000 to deal with a $5000 balance!
• Bigger, more problematic debt. As time goes by, your debt will grow because of accumulated interest and fees, so you’ll need more money to settle the account. Current accounts will be transferred to legal departments or collection agencies.
• Lawsuits. If you don’t pay your debt, the creditor has the right to take you to court. In fact, using such a company can prompt a lawsuit rather than avert one.
• Scams. Some debt settlement companies will take your money and disappear - leaving you with deeply damaged credit, possible lawsuits, and a lot less money than you used to have.

Alternatives
You may be able to settle the accounts on your own, or pay your obligations with a Debt Management Plan. Also, if you have the cash to put into a debt settlement account, you could have enough to make minimum payments to your creditors. Develop a budget to know and refine your cash flow. By increasing income or trimming expenses, you may be able to pay as agreed – and really improve your financial standing.