Does Credit Card Debt Settlement Really Work?

Recently, the mortgage crisis and resulting economic recession has driven many Americans to rely heavily on credit cards sustain them during this difficult financial time. As a result, many people have found themselves buried under an insurmountable pile of credit card debt. If you are one of them, you've probably heard about credit card debt settlement.

Companies are springing up left and right, with commercials and internet advertisements promising to settle your debts for pennies on the dollar, or instantly eliminate 70% of your debt! Is this for real? Can they actually do anything?

The reality is most of these companies are ineffective, if not an outright scam.

How Does it Work?

Debt settlement works, more or less, like this:

1. They Tell You to Stop Paying Your Credit Card Bills

Yep, that's right, just stop paying them all together. You usually have about 60 days before the credit card companies will begin taking legal action.

2. Pay Us Instead

Instead of repaying your debts, the debt settlement company will collect your monthly payments and set it aside in an interest bearing trust account. Of course, this is not before they take their hefty fees out of it.

3. They "Settle" Your Debt

After a few months of payments and interest earnings, they go to the credit card companies on your behalf with a lump sum of cash from your trust account, and negotiate the debt away in return for a lump sum of cash, usually about 30% of the amount owed.

What Happens to the Debtor?

By the time the debt settlement company approaches the card company and tries to settle the debt, it's likely that a lawsuit had already been filed and the debtor is now in much more trouble than they were in the beginning.

The Bankruptcy Option

The fact is, if you've become indebted to a point that you are unable to realistically repay it, the only real, 100% effective option is to use the bankruptcy court to force your creditors to back off and allow you to figure out a solution. Bankruptcy carries with it an unfair stigma, but in reality it provides real solutions that no other option can match.

Bankruptcy law protects consumers and offers a way to eliminate unsecured debts (credit card debt and personal loans) so that debtors can pay their important monthly bills like a mortgage or rent, car payment and utility bills.

Using a Bankruptcy Lawyer to Negotiate Debts

Even if bankruptcy is not the best option, a bankruptcy lawyer can be much more effective in negotiating with credit card companies than a debt settlement company. Why? Because credit card companies know if you file for bankruptcy they won't get a dime. Just the threat of bankruptcy is sometimes enough to lower interest rates, reduce principle or otherwise lower credit card debt and payments.