•Credit Score – A debt settlement program will most likely have a negative effect on your credit score. How much your credit score will drop will be determined by how your credit score is right now. If you have been behind on your debts for a while already, your credit score may not be affected as much. If you have a great payment history and good credit score when you enroll in a debt settlement program, your credit score will likely plummet. A debt settlement program is NOT designed to improve your credit; it is a strategy to eliminate your debt as fast as possible and for as little as possible. Maintaining a solid payment history with all of your creditors is the only way to improve your credit.

•Balances can grow- When you fall behind on credit accounts, there may be late fees or interest charged until the accounts are settled and your creditors are under no obligation to reduce the balance owed.

•Lawsuits – Creditors have the right to sue in order to collect their debts. Each creditor has their own rules and policies as to whether or not it will follow through with a lawsuit, and these policies seem to be constantly changing. The only sure way to prevent a creditor from suing is to settle the account before they decide to take legal action. The fact always remains that a creditor exercising their right to sue is a possibility and if you are sued or taken to arbitration it is important you get legal advice and follow it concerning how to respond to the statements in court or arbitration claim. In my experience any time somebody failed to respond correctly to a lawsuit or complaint, a judgment was automatically entered for the creditor.

•Income Taxes – Another thing to be aware of with any debt settlement process is that it may have an effect on your personal income taxes. If the amount of forgiven debt exceeds $600, your creditors must report it to the IRS on a form 1099C as “Forgiveness of Indebtedness Income”. According to information on the IRS website this income can be excluded from your income tax under certain conditions such as if you were insolvent at the time the debt was settled. I always recommend using a tax professional to help with your tax returns while involved in a debt settlement program.

•Income – In order to be successful with any debt settlement program you must be able to maintain a steady source of income. The goal should never be to stretch out a debt settlement program as long as possible; it only increases your exposure to all of the dangers above. A debt settlement program should never last beyond 36 months, you may be a better candidate for bankruptcy or credit counseling/consolidation if you need longer than that build the sufficient reserves.

•Upfront Fees – Pending legislation threatens to ban upfront fees and essentially shut down debt settlement companies that survive on charging upfront fees. If you have already determined that debt settlement is a good option, avoid any companies that charge their fees upfront before settling your debt. They could guarantee to settle all your debt, but they can’t guarantee they will be in business long enough to do so.

If you struggle with debt you’re probably getting bombarded with offers to help. It can be extremely confusing deciding where to turn, but it’s a very important decision that could either get you on track, or possibly set you back even further. Any company you speak with that doesn’t clearly disclose their fees or the above mentioned dangers, watch out for and look elsewhere for help.