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.
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
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.
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.
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.
Fees: Good settlement companies charge fees as per the industry standard. They follow the FTC rules and avoid charging any upfront fees. They give a breakdown of fee structure to debtors.
Accreditation: Companies offering good debt resolution services would be accredited with BBB, the International Association of Professional Debt Arbitrators (IAPDA), the American Fair Credit Council (AFCC), etc.
Proper website: 3Good 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
Checklist of BBB requirements to get enlisted:
- How long the business has been operating
- The number and nature of complaints against the company
- Any licensing or government actions against the organization
- Transparency of the business
Settling debts on your own vs. settling debts with professional help
||Settling debts on your own
||Settling debts with professional help
||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
||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
Pros and cons of debt settlement
- AYou can save money through settlement
- BAffordable single monthly payment
- CYou can get your financial life back in order
- AThe negative item will stay on your credit report for 7 years
- BYour credit score may get reduced to some extent
- CYou may have to pay a tax on the forgiven debt amount
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.
Do's and don'ts of settlement
- Organize paperwork when you decide to opt for settlement
- Be proactive and contact your creditors when you face difficulty in managing any of your debt
- Always finalize through written communication and you can take help of sample settlement letters available online
- Don’t overlook the effect of settlement while deciding which debt relief option to go for
- Don’t opt for a settlement program without shopping around and comparing various settlement companies
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.
- Which one is a better choice - Settlement or bankruptcy?
- How long will it take to settle your debts?
- What will happen to the late fees when you’re settling debts?
- Can you get rid of your medical debt through settlement?
- Can you settle your payday loans?
- Will your wages be garnished if you opt for settlement?
- Can your creditors sue you during the settlement process?