Debt Settlement Information
Debt settlement may be the answer if you have bills in collections or can no longer afford to make your minimum payments. However, keep in mind that there are traps to avoid when settling your debt. The best approach may be for you to use an attorney. Additionally, stay away from settlement mills. These are companies that process thousands of settlement clients, most of whom are not satisfied with the service or results.
Settlement should not be seen as an overall solution to your debt. One debt may need settlement while another can be consolidated. Read more below.
What is debt settlement?
Debt settlement is an approach to debt reduction in which the debtor and creditor agree on a reduced balance and regard it as payment in full. It is a process of negotiating with your creditors to pay off your credit cards and other unsecured debt for an amount less than you currently owe. Often this is at a 40-60% savings. You would have to be behind in your payments for creditors to settle your debts at a reduced amount. Typically, if you were using a settlement company, you would pay a percentage of the savings as a fee.
Creditors may put up resistance before cooperating with a settlement offer. Some creditors will not negotiate at all. This is why doing it yourself can be extremely frustrating and fruitless. Skilled and experienced debt settlement negotiators may claim to have rapport with collection agencies and tend to be more successful in obtaining settlements. However, there is no substitute for an attorney-client relationship when negotiating with your creditors.
How does debt settlement work?
Whether you decide to enroll in a legal settlement program or negotiate settlements on your own, the process is the same. You’ll need to set aside money to build up a settlement fund. Once you save enough to make a reasonable offer, negotiate with the creditor for a reduced payoff amount. Normally your offer would be between 25% and 50% of the outstanding balance.
Once the creditor agrees to the settlement amount, you make payment and the account is paid off. You then continue putting money into your settlement fund to save enough for negotiating the next debt. The process is a cycle of saving up and setting aside money, negotiating and paying the settlement.
Every person’s situation is different, but in many cases, debt settlement can help you:
- Eliminate debt in 2 to 4 years.
- Save you thousands of dollars
- Reduce your monthly payments
- Give you one single payment per month.
Disadvantages of Debt Settlement:
Your credit will be affected in a negative manner. This type of item will remain on your credit report for a number of years. Consumers still opt for settlement because they find it preferable to bankruptcy. Usually, the way it is reported on your credit record involves the words “Settled” or “Settled as Agreed” or “Paid as Agreed”. However, all the late payments may remain on your credit report until the statute of limitations runs out. At that point, credit repair might help to remove the negative marks if the reporting creditor fails to provide documented proof to the reporting agency.
Your creditors will continue to harass you throughout the process of negotiations and you may be sued or even garnished. However, you can only be garnished by one creditor at a time and in some states, you cannot be garnished at all. Most debt settlement programs will only accept you if you have $10,000 or more in unsecured credit card debt. Prior to entering a settlement program, it is vital that you consult an attorney.
This debt relief option should only be selected when you know that you cannot afford debt consolidation and you do not wish to file bankruptcy.
What if I don’t want to Settle:
Most consumers don’t like the negative effects that a settlement program has on their credit. Additionally, there are many risks involved with the settlement program such as judgments, liens, garnishments and more. If you do not want to settle your debt, a debt consolidation plan may offer you the monthly payment you want without the negative effects of a settlement program.