Wondering what a debt settlement is or if it is the right option for you? Some consumers find great benefit when using a debt settlement, but it can be a difficult process to navigate. Keep reading for more information on debt settlement and why it may be the best option for you to eliminate your debt and finally achieve financial freedom.
What is a Debt Settlement?
The goal of a debt settlement is to pay less than you owe but still pay off our accounts in their entirety. Most debt settlement companies will work with your creditors to determine an acceptable payoff amount. The difficult part is determining how much your debt will be reduced and how this will affect your finances in the long run. Some debt settlement companies boast up to a 50% reduction in your debt, but you should be cautious with this declaration.
There is no fixed determination as to how much your debt may be reduced, and there are many other “catches” that you should be aware of when considering a debt settlement. A debt settlement typically lasts anywhere from 3 to 4 years, and during that time you will be accruing interest on the debt you owe. This will actually increase your amount of debt, all the while the debt settlement company is working to get the creditors to reduce the payoff amount.
A legitimate debt settlement company will only accept you as a candidate if they feel a debt consolidation loan, debt management plan or bankruptcy is a better option. Of course, a predatory company or a scam will accept any and all candidates, even if this is not the best financial option for the consumer. Be sure to research the company you decide to work with and make sure they are legitimate and have a proven track record of success.
While paying a reduced amount may sound great, you should also consider the fees, charges, and rates that will apply. The debt settlement company may charge 25% of the amount of debt that is forgiven, so you are not really reducing your debt by the full settlement amount. In addition, any debt that is forgiven or settled must be claimed as income on your next year’s taxes. Using a debt settlement company will damage your credit score, as it will remain on your credit report for up to 7 years. This not only lowers your credit score, but it will increase the interest rates for any future account you may open.
It is possible to get a debt settlement and still end up paying back the amount of your original debt or even more. The excessive fees and interest rates can add up quickly, so it is important to carefully consider if this is the best option for your financial situation.
The Debt Settlement Process
A debt settlement can be a long, drawn-out process that can take months to years to complete. You may decide to hire a debt settlement company or a lawyer to represent you on your behalf, or you may consider doing all the negotiating yourself. It may be beneficial to use a company or a lawyer who already has experience with debt settlement and the process, but it is up to you to make that decision. Offering a lump sum to a creditor may increase their receptiveness to a settlement, so if you can, start saving so you can make a significant payment up front.
The debt settlement company or lawyer will then ask the lender if they are willing to settle, and at what amount. It is important to note that if your account has already been turned over to collections because of non-payment, then your chances of getting a settlement are greatly reduced. In most cases, collections agencies will not negotiate or offer a settlement.
Here is the catch: it could take several years for you to save up enough money pay even a reduced debt amount. The debt settlement company, in most cases, will request that you stop paying on your accounts. They want you to send your money to them instead, so they can build an account for your creditors. During this time, you continue to be charged interest and late fees for each one of your accounts. This will significantly damage your credit score until the settlement is reached and you pay off that debt. In order to be eligible for a debt settlement, your accounts must be categorized as “seriously delinquent.”
Once you have a significant amount in your settlement account, the debt settlement company or lawyer will make an offer on your behalf. Keep in mind, a creditor has no obligation to settle or accept any settlement offer. The negotiation process could take up to several years, all the while your debt is accumulating. If the creditor does accept an offer, be sure to get their acceptance in writing, and check your credit report to make sure the settlement has been documented and reflected in your credit score.
A debt settlement can be risky because there are no guarantees, the process may take several years. Although if the debt is settled your credit score will improve, during the debt settlement process it will be extremely low. You won’t be able to open any new accounts, and you should stop using any credit cards to avoid falling back into a situation you can’t handle.
As the money in your settlement account accrues, the debt settlement company will use that balance to negotiate with your creditors, although you will have the final approval for any negotiation that is made. Once an agreement has been made, your debts will begin to be paid off. You will need to sign a credit card settlement agreement before the debt settlement company pays off your debt.
What Kind of Debt Can I Include in a Debt Settlement?
As previously discussed, credit card debt can be included in a debt settlement, in addition to medical bills. If you have federal student loans, you may be able to include that debt into a settlement, but it is extremely difficult. Any federal student loan that is in default may allow a lump-sum payment if you pay the balance plus interest, pay the principal plus half the interest or pay 90% of the remaining principal balance and interest.
So, it is possible, but if you are struggling financially, chances are you don’t have that much money to repay the loans. If you have a student loan from a private company, you have a better chance to get that debt included in a debt settlement.
Auto repossession balances may also be included in a debt settlement, but you will have to act fast to avoid physical repossession of your vehicle. It is important to notify the lender immediately and try to negotiate a deal that will allow you to repay the balance and keep your car. If possible, notify the lender before you miss your first payment and ask them if they will allow a settlement or negotiation that will return the status of your loan to current.
How to Find a Reputable Debt Settlement Company
A debt settlement or debt resolution company typically has experience dealing with creditors and negotiating debt down. Some creditors may even be familiar with these companies before they begin working on your behalf. A reputable debt settlement company will be staffed with credit counselors and experts at analyzing personal finances, and they also have an understanding of the creditors and their willingness to negotiate and allow the debt to be settled.
You can find reputable companies and organizations online, although there are some scams online as well. If you think you have found a legitimate company, do a quick search online to review their reputation and see if they have a Better Business Bureau (BBB) (or similar organization) approval.
In most cases, you will work with a credit counselor to determine your total debt amount and develop a settlement plan. The plan should include your total debt, details of your monthly payments and the fees and charges you will incur which the debt settlement company earns their profit from. Be sure to carefully review this plan before you decide to go ahead with the negotiation process. You should be able to make the monthly payment without causing further damage to your finances.
What to Look for in a Debt Settlement Company
There are a few things to look for when selecting the right debt settlement company or organization for you. A good debt settlement company will disclose all fees and costs and make sure you understand them before asking you to sign an official agreement. In addition, the agreement should be clear and concise, with easily understandable language and terminology, including the company policies and debt resolution programs.
The debt settlement company will also provide you an estimate of how long the waiting period will be before they make a settlement offer to each creditor. They should also provide you with an estimate of the results, but no guarantee is made, because it depends on the creditors. If you receive any type of guarantee from a debt settlement company, it is probably not legitimate. The plan they provide should include the amount of money you need to save before they will begin paying off any creditors.
In addition, a reputable debt settlement company will request your approval before making any official resolution offer.
How will a Debt Settlement Affect my Credit Score?
If you are looking into debt settlement as an option to reduce your debt, chances are you already have a relatively low credit score, and that is ok. We’ve all been there. The most important thing is that you are taking action to resolve your issues and overcome your debt.
One option to consider is to contact your creditors to determine if they will report your payoff amount as a debt settlement to the credit bureaus. If so, then the settlement will remain on your credit report for 7 years. If you can convince them to report the payoff as debt paid in full, then you are on your way to a higher credit score once the debt has been paid.
How Do I Know if a Debt Settlement is the Best Option for Me?
It all depends on your specific situation and financial status. You may want to contact a debt settlement company and speak with a credit counselor. As mentioned previously, a legitimate debt settlement company will tell you if a debt settlement is a good option for you or not. If it is, then you may want to proceed with developing a settlement plan so you can see what the total amount of debt is and how long it will take you to save the money you need to settle.
If debt settlement is not the best option for you based on the credit counselor recommendation, they should offer you some alternatives that are right for you and your financial situation.
Debt Settlement Alternatives
There are alternatives to debt settlement that you may also want to consider. There are many options available for reducing or eliminating your debt. You may want to research debt consolidation loans, debt management plans, bankruptcy or developing your own individual plan to repay the debt on your own. Although any option may temporarily lower your credit score, in most cases, if you handle your debt responsibly, you will eventually see that score rise once you have your debts paid down or paid off completely.
As with any debt payment, it is important to understand the loan terms, fees and charges, in addition to the amount of time it will take you to become debt-free. If you are still considering a debt settlement as the answer to your financial struggles, be sure to use a reputable company and read and understand the agreement before you officially sign to approve the negotiations.
Financial Advisor, MoneyBeagle
Dan is one of the top financial experts when it comes to debt consolidation. With more than 20 years of experience helping people tackle debt, he has a unique insight when it comes to solving debt-related problems.
Dan got his start when he went to work for a bank after getting his Business Degree. He worked his way up and became a loan officer. This position gave him unique insights into the ways that financial products work and how people can utilize different financial products to improve their lives. He’s seen hundreds of success stories and just as many failures – so he knows what steps are most likely to help his readers.
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