Debt Settlement Deals Come With Big Risks

NEW YORK (TheStreet) -- On the surface, debt settlement deals sound like an answer to a financially struggling consumer's dream.

You can cut a deal with a lender to pay a lump sum -- usually well below the actual amount of the debt -- and remove that debt from your life forever.

But up to 80% of all debt settlement deals may never close, no matter what the lender or creditor says, and many debt settlement deals leave consumers owing more money.

A study from the Washington, D.C.-based Center for Responsible Lending clarifies the risk associated with the deals, especially when working with third-part debt settlement companies, and concludes that such deals represent a "risky strategy" for consumers that often leaves them "more financially vulnerable."

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"The idea is simple: Debt settlement companies offer to negotiate down the outstanding debt (usually from credit cards) owed to a more manageable amount so that a consumer can become debt free," the CRL says. "Unfortunately, debt settlement carries significant risks that may result in consumers becoming even worse off."

The list of things that can go wrong is lengthy, the study finds. Lower credit scores, high fees, rising interest rates, tax liability and potential lawsuits are all on the docket when considering a deal. Some creditors refuse to negotiate with debt settlement companies, and the CRL says consumers must be able to settle "at least two-thirds of the debt they enroll in a debt settlement program" to see a benefit.

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