Let’s start with the basics. When you attempt to arrange a debt settlement, you are asking your creditors to take less than you owe them. Typically, they will only do this if they are uncertain about your ability to pay what you actually owe. Getting something is better than nothing, in their view. Companies that charge big bucks to settle your debts can further this uncertainty by collecting money from you, but paying nothing to your creditors, for several months. They may see the payments you make to them as their fee, while you are thinking they’re aggressively making progress on your debt. So you must tread carefully there, and do your homework. If debt settlement is your answer – and it is not a magic bullet – then consider going straight to the financial institution you owe to. I believe you can do for yourself what you pay an “expert” to do for you.
There are downsides to debt settlement, to be sure. And you hit the nail on the head in terms of this path negatively impacting your credit report and score. Ultimately, these debts will be noted as “settled-in-full” on your credit report, indicating that you settled the account for less than what you owed. All future lenders will see those notations and definitely consider that information as they decide on interest rates to charge you, or if they should lend you money at all. Another reason to not settle debt is that you could be issued an IRS Form 1099-C for the “forgiven” amount. Not only are you creating a negative entry on your credit report for up to seven years, but you may also have taxable income out of the deal. I call that a double whammy.
So I would consider charting a different course. Contact a credit counselor through the National Foundation for Credit Counseling (http://www.nfcc.org/). They will work with you to right your financial ship, and if absolutely necessary, will help you implement a debt management plan (DMP). A DMP will allow you to make one payment each month to the counselor’s agency, and that payment will be distributed to your creditors (right away). This approach will likely take longer than a settlement, but will have less of a negative impact on your credit score. It will also demonstrate to future lenders that you are willing to take personal responsibility for your debts. Good luck.