Bad Credit Rescue: Debt Resolution

One of the most popular debt resolution methods is known as debt settlement. It's a way to reduce unsecured debt by negotiating with lenders. When you hire a company to do this on your behalf, they'll ask you to stop paying your bills and send them the money instead. They'll put that money into an account for you (taking a chunk for their troubles) and wait for your credit score to go down. The longer you ignore your bills, the lower the score will fall.

Once your credit score is sufficiently low, the debt settlement company will contact your lenders and try to reduce the amount you owe. Lenders will take one look at your credit score and agree to a lower amount. Borrowers with low scores aren't credit-worthy. Lenders worry that they'll default on their debts completely. Some money is better than no money.

Once an agreement has been reached, the debt settlement company will take the money from your account and settle the agreed portion of your debts. The remaining debts will be erased. You'll have a clean slate.

If this sounds tempting, consider the downsides. Not all debt can be erased. Student loans cannot be, nor can child-support payments. You may be able to negotiate for a lower tax debt, but this will have to be done separately from debt settlement. Speaking of taxes, you'll be liable for income tax on the erased debt, as the IRS considers it the same as income.

The biggest downside of debt settlement is that it destroys your credit history. It will take years to raise your credit score high enough for you to get any type of credit at all.