What is Debt Settlement and How Does it Help?
Debt settlement is a process where you pay less than your outstanding dues. Here, a debt settlement company or you negotiate with your creditors to cut down the outstanding balance. If your creditors don’t give a nod to the debt settlement program, then you can threaten to file bankruptcy. And, this trick might work for you since creditors would want to recover as much as possible.
What does debt settlement mean?
Debt Settlement means that your creditor has agreed to reduce your overall debt value and hence, you need to pay a lesser amount to waive off your debt. The creditor would no longer disturb you for monthly payments and also, you no longer need to worry about getting sued over a pile of debt. Although, it may sound interesting, it does have its risks like a huge reduction of your credit score, can be costly and can be a testing time for your patience as an average debt settlement routine extends for more than a year.
Debt Settlement Plan Helps You:
- Settle your credit card debts fast
- Pay less than what you owe
- Save dollars and avoid bankruptcy
- Reduce annoying collection calls
How a settlement company helps you in settling your debts
If you are the person who has taken a loan and has unfortunately, skipped the monthly or quarterly payments as prescribed and has got interest piling up with each passing month, then debt settlement is your only resort. Most of the times, the creditor would not accept an amount lower than the amount due if he finds out about the fact that you can easily pay the full amount.
The debt settlement companies have got solid negotiation skills. However, they don’t entertain certain kinds of debts like federal student loans as it can be managed on their own. Settlement works only if there is absolutely no chance of paying off your debts. A simple way includes opening a savings account and putting a monthly payment there itself to accumulate on your savings. Once the lump sum is good enough, then the negotiators try to negotiate with the creditors to accept the lump sum instead of all the monthly payments at one go.
The following process is involved –
Monthly payable amount
The settlement company analyzes your financial condition and decides upon a monthly payment, which you need to pay to the company every month.
Settlement negotiation
It negotiates with all your creditors to reduce the payoff amount to some extent.
Get rid of one debt
Once the creditors agree on a reduced payoff amount, the company makes the payment, and you get rid of the specific debt.
Settle multiple debts
Thus, you clear all your credit card debts one after another with the help of settlement companies.
Risks associated with Debt Settlement
Debt Settlement sounds promising but it has got a lot of risks associated with it. Like –
Your credit score would literally be shattered. You would find it really difficult to get your loan application accepted in the future. You will end up neglecting your account once your debt payments are diverted towards the settlement account. Neglected accounts and the debt charged will stay in your credit reports for over 7 years.
Your penalties and interest rate would continue to rise and you would likely be hit with late charges and penalty fees as well.
Often Debt Settlement isn’t guaranteed. If your debt settlement company is not a good one, you might end up with a shattered dream of getting your debt settled.
Other risks include paying a huge fee once the debt is settled. The companies that will settle your debts will ask for a lump sum once the process has been completed. Some of them charge a percentage of the debt as a fee. Some charge a percentage of the debt that has been a settlement. Overall, it can be a quite costly affair.
Often, the debt that was forgiven is taxable. Yes, no one can escape taxes, not even you whose debt has been settled succcessfully. Internal Revenue Services often regard forgiven debt as a valid income and hence, it is suggested to consult a tax professional about the taxes associated with the settled debt.
Often a lot of settlement companies are fake and often run fraudulent services. According to reports, there has been thousands of complaints about fake debt settlement companies operating in the United States alone. Hence, we suggest you to choose wisely.
How to choose good debt settlement companies
- Online support: Problems and doubts may crop up anytime. A good debt resolution company would provide extensive customer support to clients through apps, online chats, phone, emails, instant messages, etc.
- Savings: Though what you save will mainly depend on your debt amount and the creditor, the best debt settlement company should be able to save you a significant amount on your credit card debts.
- Transparency: A good debt resolution company would explain the debt settlement process clearly. The debt negotiators will tell you about their business policy clearly. They will tell you how much you have to pay for settling debts.
- Proper Website: Good companies offering debt settlement services have a clean website. You can get details of debt settlement services from the website. You can check out the client testimonials, FAQ section, contact details, accreditation, etc. from the website itself.
- Reviews: You should only allow a company to negotiate your debt when it has good reviews. If the clients are not satisfied with debt settlement service, then there is no point in working with the company.
Make sure the debt settlement program complies with BBB (Better Business Bureau) standards
Settling debts on your own vs. settling debts with professional help
| Settling debts on your own | Settling debts with professional help | |
| Negotiation | You need to decide how much you can pay every month | The settlement company analyzes your financial condition and decides upon an affordable payment |
| Mode of payment | Usually you need to make one-time payment towards each of your accounts | You need to pay an agreed upon amount to the settlement company every month |
| Fees | You don’t have to pay anything other than the settlement amount to the creditors | You need to pay a certain amount as professional fees |
| How to decide | You want to save more money, but you should have proper negotiation skills to convince your creditors to agree to settlement | You want complete professional guidance to settle your debts, though you’ll have to pay a fee for the services provided |
settling your debts with professional help
- You can save money through settlement
- Affordable single monthly payment
- You can get your financial life back in order
Tips to settle debt for 10 cents on the dollar
- Check the SOL period of your state: Creditors cannot sue you after the Statute of Limitations (SOL) period is over. This means creditors can’t garnish your paycheck or levy your bank account once the SOL period is over. So, you can choose not to settle your debt.
- But, there is one point you need to consider. The debt will still be there on your credit report for 7 years. So, you can’t expect that your creditors will remove the listing from your credit report.
- Check the status of your debts: Creditors are less likely to settle accounts on which you’re current. So it would be best to settle accounts on which you are past due.
- Save as much as you can: Debt negotiators can’t start negotiations unless you save a specific amount in the trust account set up by the settlement company. So save as fast as you can in the trust account. This will help you settle your credit card debts quickly.
- Download a debt settlement letter: You’ll need these letters at various stages of negotiation. First, you’ll need this letter to propose a debt settlement plan to creditors. Next, you’ll need another letter to propose what you want to pay in response to the settlement offer made by creditors.
After that, you’ll need a letter of acceptance of the verbal offer. Finally, you’ll need a proper settlement agreement letter. You can take a print out of settlement letters.
Points to Note When You Decide To Try Debt Settlement
If you have finally decided to go with the debt settlement, here are the most sought out tips for choosing the right company –
- Research about the company in a proper manner and make sure that it is reviewed well on all forums across the web.
- Make sure that the fees are structured as a percent of your debt that is going to be eliminated instead of the total debt balance.
- Make sure that the company has a history of debt settlement and has been in business for a good solid time.
Before settling your debt, do make sure that your creditor has a policy for settling debts because a lot of them don’t have one.
Who should go for debt settlement programs?
Debt settlement programs are a viable option for the people who have various types of unsecured debts such as:
- Medical debts
- Credit card debts
- Collection accounts
- Unsecured loans
- Personal loans
Secondly, most creditors would not accept a debt settlement agreement letter unless you’re suffering from genuine financial hardship. Usually, financial hardship happens due to job loss, overspending, death of a spouse, etc.
Debt settlement programs would work only when you can’t pay off debts yourself. You’re less likely to be eligible for a debt settlement program if it isn’t the case.
Apart from Debt Settlement, First Option Recovery also offers services likes Debt Management and Debt Consolidation.