Debt settlement is a process of negotiating with your creditors to repay your debt. Sometimes this means accepting less than what you owe them. It might sound like a great idea, but it’s not always the case. Here are some things you need to know about how debt settlement works and all that comes with it!
1. What Is A Debt Settlement?
A debt settlement is basically an agreement with your creditors to repay your outstanding debt. The process involves giving information about your income and expenses. Your creditor will then present you with a potential repayment plan that may reduce what you can pay back. If you agree, you will come up with a payment plan that is suitable for you. After a creditor agrees that a debt settlement is an option, they will send you a “Settlement Proposal.” This proposal will state how much your outstanding balance is. The creditor then collects the settlement amount on your behalf.
Besides creditors, debt settlements can also be made with debt collection agencies, credit card companies, and mortgage companies. When searching for a suitable company or agency, make sure to check all the reviews that can be found online. Reading reviews will help you find a company that is legitimate and has positive customer feedback.
2. What Are The Benefits Of Debt Settlement?
Before exploring the risks involved, it’s also necessary to discuss the benefits of debt settlement. First of all, not everyone can qualify for bankruptcy. If you’re in this situation and have debts that are eating up your income every month, a debt settlement might be a solution. Also, one of the main benefits is that you do not have to pay as much money compared to paying off your debt in full. You can also negotiate the interest rate or fees with your creditor. Besides that, you can also escape late payment fees and interest rates.
3. What Are The Risks Of Debt Settlement?
There are actually quite a number of drawbacks if you do not approach negotiations strategically. The biggest risk with debt settlement is that the creditor could sue you. It’s fairly easy for a creditor to get a default judgment against you, which means they can take your property without giving notice to you beforehand.
Another risk is that your credit score can worsen as a result of debt settlement. It will take at least six months before the negative mark on your credit score is removed. This means you will not be able to get loans or other credit cards until your credit score recovers.
4. When To Consider Debt Settlement?
Debt settlement should only be considered if it’s about repaying an unaffordable loan that has a clear end date like a mortgage, student loan, etc. Creditors are willing to go through debt settlement rather than letting you file for bankruptcy.
It is also beneficial to consider debt settlement if you have a large amount of debt. As the process involves negotiating with creditors, it can be time-consuming, so choose your battles wisely. Sometimes, settling for less than what is owed might not be the best option as interest rates will still apply to some parts of your total debt. Be sure to check all the terms and conditions before signing an agreement as well as what happens if you were to miss payments.
5. What Are The Fees Involved?
Before you choose to use an agency or work with a company to handle your settlement negotiations, check if their services are cheap or not. Most of the time there will be some fees involved with this process. The fees involved with debt settlement are generally high. A third party, typically an agency or a company, will set up and handle your settlement negotiations for you. These agencies and companies may charge you a fee of around 20 percent of the total settlement amount. This amount can be large if your settlement is worth a lot. For example, if you owe $20,000 and the agency charges 20 percent, that would be $4000.
A small number of agencies and companies will charge a flat fee for their services instead. In this case, you’ll have to pay between $500 and $2,000 depending on how much debt you owe.
You may also need to pay a monthly account-keeping fee if your payments are not received by the creditor or if your account is not settled at the end of a year.
6. What Are Other Alternatives?
Besides a debt settlement, you may want to consider other options such as consolidating your debt or filing for bankruptcy.
Debt consolidation means you get a new loan that pays off all your debts and then make monthly payments with lower interest rates and fees on the new loan. Consolidation is useful if you have multiple debts that you cannot pay off.
Filing for bankruptcy eliminates your debt and gives you a fresh start financially. It will give you some protection from wage garnishment and creditor harassment while also stopping collection calls and letters.
However, filing for bankruptcy can have its drawbacks as some creditors are not willing to negotiate at all even if you only have a small amount of debt left.
While some people may consider debt settlement to be risky, it is also your best option if you are unable to repay the full amount of your debts within five years or if you do not want to file for bankruptcy.
If you are unsure, the best way to find out is to contact an expert who can give you unbiased advice on how to handle your financial situation.
Debt settlement can be a great option if you owe too much money and you are unable to repay the full amount of your debts in one go. It is important to remember that there are risks involved in debt settlement, so make sure you weigh each option carefully before proceeding with any negotiations. Also, make sure to check what customers have to say about a certain agency or company to make sure they are reliable and do a good job. We hope this article has clarified the process of debt settlement.