A debt settlement usually means that your credit card companies have gone into agreement with you. They essentially accept less (usually half) of the full amount that you owe them.
Furthermore, the credit card companies that you have dealt with for so long and built such a strong relationship with cannot continue to bother you about the debt. Plus, you do not have to worry about getting sued. This is a roller coaster process, but may be well worth it in the end.
Debt settlement can be risky, of course, just like anything else:
- Especially in the beginning, debt settlement can negatively impact your credit.
- Depending on the creditors and the settlement company you choose, reaching a final settlement can take quite a bit of time— sometimes up to 3-4 years.
- There are costs associated with the process of settling a debt, and this can sometimes add an additional financial burden to your plate.
- Taxes may be owed on the total settlement amount. Any amount of debt that is settled may be considered to be taxable income by the IRS.
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Being in Debt can be Stressful
It not only can negatively affect your credit score but more importantly your emotional bank. It wears not only on the individual but also one’s family. Being behind in your credit card payments and other unsecured debt can spiral into other areas of your life.
A good debt settlement company will have your best interest in mind. They will present certain aspects of the process and guide you through it. They will want you to understand how each step works.
How does Debt Settlement Work?
The primary purpose of debt settlement is to reduce your overall level of debt when you are behind and have an excessive amount of late or even missed payments.
A debt settlement company will negotiate with your respective creditors on your behalf to bring down what you owe to them. This is done mostly on what is called, unsecured debt, such as credit cards or personal loans. This is not an option for other types of debts such as a student loan.
In some cases, debt settlement offers won’t work at all unless you stop making payments with the creditors you owe. The extra money from the monthly payments can go into a savings account instead. When there is enough money built up into the savings account, a debt settlement can be negotiated to a smaller amount with the creditor.
Debt Settlement Alternatives
In the event that you are far behind in making payments, it does not hurt to at least call your creditors. Many lenders have hardship programs which may be able to help your financial situation, but they can be difficult to find unless you ask. Just make sure you can afford the negotiated payment with the creditor, and if you’re using a company to negotiate on your behalf, be sure to account for their fees as well.
Educate yourself on what’s likely to happen if you are looking to go on your own with settling your debt.
Save as much cash / money as possible, so you can make the payment in one lump sum. Even if you have to take a side job, perhaps deliver food or serve at a restaurant, in order for this to happen. Creditors would be happy to take you up on this offer, since it guarantees them a one-time payment, rather than multiple payments.
When everything is said and done, you want to try the best option possible. If one thing doesn’t work, then try another solution for reducing your debt.
Is Bankruptcy the Option to Wipe Your Debt?
There are countless financial advisors and high-ranking debt consultants that suggest filing for Chapter 7 Bankruptcy. However, filing for Chapter 7 may not be the best option for you. Filing for bankruptcy can put you in a position to wipe out all your unsecured debt and anything else your attorney can include during the filing. Of course, there are more detailed questions you may want to ask them first before taking this drastic step.
A Chapter 7 bankruptcy may also be one of the best options for you. The rebuilding process begins right after the filing. Even though your initial consultations with the attorneys are generally free, there are of course fees that you will need to pay at the end of the filing process. Consult with a bankruptcy attorney for more details.
Check to see if you’re eligible for a debt management plan, which is normally offered through a nonprofit credit counselor. This is the best path for you, if you do not qualify for a traditional bankruptcy (Chapter 7 or Chapter 13). There are many benefits for going down that route.
It may be a good alternative to go down this route. Considering that it will not reduce the amount that you must repay. This will reduce your interest rate and also reduce your monthly payments. Your credit will typically have less of an impact by doing this, than filing for bankruptcy. However, this option is not for everyone, so consult your financial advisor or attorney before proceeding.
Ready to Settle Your Debts?
If the debt settlement route is the right path for you, here are some pointers on what to do:
- Do your research. Find out the company you are dealing with does not have any dings or complaints against them. Check out their company reviews.
- Ensure that fees are set-up as a percentage of debt eliminated instead of a debt balance at the engagement; which provides the company motivation to reduce more of your respective debt that you owe.
- Do not work with a company that makes promises to help you go up against debts to have them marked as “invalid”. This is a sneaky tactic that can actually come back to haunt you with more threatening consequences and actions.
If you are looking to work directly with a debt settlement company, then check out our debt settlement company reviews page.Get Help Now