Getting out of debt: pros and cons of debt settlement

If your debt has started to get overwhelming, you are bound to start looking for a way out. In fact, you have several options, from self-help to filing for bankruptcy. It depends on your personal financial situation as to which option suits you better. However, many people opt for  debt settlement.

Debt settlement is an option that helps you settle your debt for a lot less that what you actually owe. It may sound good but you should be aware of its pitfalls. In this article, you can find out the advantages and disadvantages of debt settlement to help you make an informed financial choice.

What is debt settlement?

What is debt settlement?

What is debt settlement?

Debt settlement is performed by a debt settlement company of your choice. Their main objective is to negotiate on your behalf with your creditors. A debt settlement company could manage to settle your debt for less than what you actually owe. You will literally be paying pennies on the dollar. It is no wonder why so many people go for debt settlement as that is perceived to be an established way to deal with debts.

What is a debt settlement attorney?

A debt settlement attorney basically does the same thing as a debt settlement company. The only difference is that he is a legal professional. For a debt settlement attorney, settling your debts is not his main work for him him unlike debt settlement companies whose main business is helping their clients settle debts. Another difference is  the fees. With debt settlement lawyers, you will probably be getting a contingency deal. That means that he will get paid depending on how much he saves for you. However, some attorneys may be specialized in bankruptcy and advice you to take that option. The choice is completely yours. You need to make sure you compare other options you are presented with. If you have your mind set on debt settlement, do not let yourself be bullied or persuaded into changing your opinion. It is important to know what is the best for yourself.

How do debt settlement companies work?

How do debt settlement companies work?

How do debt settlement companies work?

First, debt settlement companies will discuss with you what kind of debt settlement program you can take up. After that, the company and you will have to reach an agreement on how much you will pay them for their service. You will also have to agree on how much you will be paying for your debts and you will have to prepare that amount in the following months. For this purpose, the debt settlement company will require you to open a separate bank account operated by a third independent party and make a monthly deposit into it until you reach the agreed amount.

Once that is done, the debt settlement company will start contacting and negotiating with your creditors. They will reach a debt settlement agreement between themselves. That agreement states how much you will have to actually pay for what you owe. When your debt has been settled with a certain creditor, you do not owe them money anymore. You have to pay the debt settlement company for their services after they’ve helped you settle your debt.

What are the advantages of debt settlement?

Your debts get settled fast

Your debts get settled fast

There are many benefits of debt settlement. That is why many people decide to go with this option to help themselves get out of debt.

1.  You do not have to deal with everything on your own – In fact, very little is required of you. All you need to do is make your monthly payments. Compared to self-help, you have to organize everything on your own – from your budgeting, negotiations with your creditors or debt collectors. It might get really hard and overwhelming and there is no saying how self-help in negotiating with your creditors may end. The good thing about debt settlement is you can just relax and let debt settlement professionals do all the hard work for you.

2. You have a trustworthy partner on your side – Whenever you are confused about the debt settlement process or have questions on how to improve your financial situation, you have your debt settlement company to help you.

3. Your debts get settled fast – Although it is not a magic tool that will make all your debts disappear overnight, debt settlement is relatively fast. It only takes up to several months. Debt settlement is fast compared to other options which may take two or up to seven years. During your debt settlement period,all you need to do is make monthly payments.

4. Your debts are getting settled for less than what you actually owe – Many times, your debt will get settled for less than 50% of the original debt. That is a really great deal and will save you a lot of money, time.

5.  It is simple  – Debt settlement is simple to understand and in its proceeding. It is only three steps – find a debt settlement company, deposit the agreement amount of money in your special bank account, sit back and wait for the debt settlement company negotiate your debt with your creditors.

6. It is easy – You don’t really have to do much except deposit the agreed amount of money in the special account.

7.  It gets you great savings – your debt could get settled for less than 50% of the original amount

What are the disadvantages of debt settlement?

disadvantages

disadvantages

Debt settlement has few downfalls too.

1. You need to do careful research on your debt settlement company

Debt settlement might be your best option but there could be people out there who try to take advantage of your situation. There are scams and scam companies. Don’t trust the first debt settlement company that you see Unfortunately, there is not dependable listing of debt settlement companies which could make it difficult when choosing the company you want to work with.

However, there are a couple of steps you can take in order not to be deceived. First, enter the name of a company you think is good into a search engine and see what people say about it online. Second, check the company with your state Attorney General. Third, check the company status at the local consumer protection agency. They will let you know if there are complaints against that company. After these three simple steps, you are about done with your debt settlement company research. All it is left for you to do is contact them and see how they conduct themselves professionally.

2. You should be careful about the scam schemes out there

You can find a lot of information warning you about scam schemes. The most popular scam is related to the fees. Some companies would require their clients to pay them in advance. Under federal law, they are not allowed to ask for this. Company may only request for their fee after they have finished some kind of service for you or when they have settled some of your debts. Even then, they can only ask for the payment for the debt they have already dealt with. For example, if you have 5 creditors and they have negotiated a successful deal with two of them, they can only receive two-fifths of their fee or 40% of their fees.

3. Debt settlement might temporarily damage your credit report

Debt settlement might damage your credit report

Debt settlement might damage your credit report

In some cases, you might be required to stop all payments to all your creditors. That will lead to negative effects on your credit report but those are only temporary. The important thing is that at the end of debt settlement, you will be debt- free and there is nothing better for your credit report than that.

4. You may continue to get calls from your creditors

Even after your debt has been settled, some creditors may keep trying to contact you and ask for repayments. Although that might seem worrying or annoying, you can deal with it. The best thing to do is consult your lawyer to advise you on how to get rid of your creditors because in some cases, those creditors may even try to sue you. However, when your debt has been settled, they have no basis to ask you for more money. Do not let yourself be bullied or harassed.

5.  Some creditors may be unwilling to negotiate

Nevertheless, that is your debt settlement company problem. If they are not able to convince your creditor to settle or negotiate with them, they will not get their fee. So the debt settlement professionals are actually highly motivated to achieve the agreed goal. The problem is that creditors are under no obligation to enter any kind of negotiations. However, for many of them, it is the reasonable thing to do to get whatever money they can have than to chase after you forever. When you are too much into debt, they may be willing to settle for less.

6. You may have to pay some bank fees   

You reach an agreement with your debt settlement company and you have to open a special bank account and make a monthly deposit into it. They will be used for the repayment of your debts. The account should be operated by a third independent party and you will have to make some payment to maintain. In reality, the money you pay to maintain that special account is just a drop in the ocean compared to how much money you are saving through the debt settlement.

It is obvious that with debt settlement, you have almost nothing to lose and a lot to win. It is the best choice you can make to be debt-free and improve your financial situation. That will not only benefit you but your family as well. Struggling with an impossible amount of debt is of no good for anybody, not even for your creditors. They want to see your debts settled too and that is why they agree to let you pay less than what you actually owe.

The effect of debt settlement on credit score

The common myth is that a debt settlement has no effect on a debtor’s credit score. Contrary to the myth surrounding debt settlement, debt settlement may affect your credit score. However, the impact may be negative or positive, depending on various conditions that may be in the present or future instances. Your credit score reflects if you have paid the debt owed as per the original agreement with your lender. A debt settlement, on the other hand,

Common myth is that a debt settlement has no effect on a debtor’s credit score

Common myth is that a debt settlement has no effect on a debtor’s credit score

negates or modifies the credit agreement. Therefore, this will possibly affect your credit score and a potential creditor will take note of the accounts that were closed by your previous creditor closed an account due to such changes brought about by debt settlement. The following are some of the factors that influence the impact that debt settlement has on your credit score:

  • the present condition of your credit
  • your creditor(s)’ reporting practices
  • the amount of debt being settled
  • if your settled debts are in good standing at that moment
  • reduced amount by which the original balance of the debt was settled for.

However, in some instances, it will be beneficial to settle your debts. This is when you factor in the opportunity cost of not having debt settlement and having your credit score affected. An example of this is when you have a situation in which you continuously submit payments late or default on the payments. Therefore, it would be better to have a payday loan debt settlement company assist you in sorting out your financial issues as not doing so in the present will lead to a bad credit score in the future. Debt settlement programs aim to reduce the amount of debt attached to your name and in so doing, this will be able to assist you if your credit score is already lowered due to late payments. Settlement of debts may be the much needed relief that you will need to manage your finances.

Debt settlement is suitable for large amounts of debt

Debt settlement is suitable for large amounts of debt

A point to note is that debt settlement is suitable for large amounts of debt. This is because the larger amounts of debt have a greater impact on your credit score. If you settle the smaller amounts of debt when you have a larger amount of debt, this debt settlement will negligibly affect your credit score. Therefore, when you feel that you are stuck in your finances and would like to improve your credit score, you will need to consider the factors that influence the impact that debt settlement has on your credit score as well as the opportunity cost of not having a debt settlement program.  At times, it would be better to have your consumer credit report reflect a debit account as ‘paid-settled’, especially if this will do away with severe delinquency.

How to negotiate with a debt collector

Falling behind your payments for a credit card debt

Falling behind your payments for a credit card debt

Falling behind your payments for a credit card debt or any other type of loan is never pleasant. You might also have a debt collector who is also on your case and constantly following up on the progress of your payments. It can be draining to receive constant emails or calls from your debt collector yet you are already trying your best to clear the credit card debt. So, how can you negotiate with a debt collector so as to be relieved from such situations?

You’ll have the option to use a company to get you payday loan relief, or if you prefer DIY then here’s how to do it:

The important thing in such situations is working on improving your credit score. You could do this by negotiating with your debt collector and have them report your debts in a certain way. This will enable you to have a credit report that does not have negative information. Therefore, you will be in good standing when a potential creditor views your credit report in the future.

The other option that you have is to offer to make monthly payments. However, before doing so, the debt collector may have you fill out a statement, declaring your income, expenses and assets. Ensure that you give out information that is true because false information may do more harm to your case, if you are signing the papers under the penalty of perjury. Also, you may give information that may work against you, so be cautious of what information you will provide. You should ensure that the monthly payment does not strain your finances and you will be able to cater for your other expenses and bills comfortably. Ensure that you have written agreements with your debt collector after you are done with the negotiations.

If you can afford to make a lump sum payment, you may negotiate for this with your debt collector. You have to set a

Lump Sum Payment

Lump Sum Payment

specific amount that you are willing and able to buy and stick with it. Do not agree to pay a lump sum that amounts to more than what you are able to pay off at that time. This is because a debt collector may assume that since you are willing to pay a lump sum amount, you are able to pay off the debt with an amount higher than that which you have suggested. Most creditors will settle for half the amount that you owe them, whereas others may want 70% to 80% of the amount owed. In cases where the debt collector thinks that the chances of you repaying the debt are minimal, they may settle for a third of the amount owed or less.

Negotiating with a debt collector is beneficial for you and the creditor. This is because you will be able to settle the debt with less pressure and they will achieve their objective of maximizing their returns. The debt collector will be pleased if you are willing to pay back a percentage of the amount owed. However, you need to consider your financial situation and not promise what you cannot deliver. This avoids the vicious cycle being continued as you may get from one debt to another. Be realistic when negotiating with your debt collector and you may just turn around your financial situation for the better.

When will credit card companies settle and when not?

It is possible to settle debts yourself or by using the services of a lawyer or a payday loan consolidation company. You may also choose the option of debt settlement so as to clear your loans. However, it is not always expected that the credit card company will agree to credit card debt settlement as a way to clear the debt. You need to be familiar with the circumstances that may be considered for debt settlement and those in which debt settlement will not be agreed to by credit companies.

Instances when credit card companies can settle:

Instances when credit card companies can settle

Instances when credit card companies can settle

  1. If you are almost bankrupt and you have been delaying on making the payments, but you are willing to make a lump-sum payment. Your credit card company will agree to settle in such a situation, even for half the amount owed, as this will be better than not receiving any money at all.
  2. If a debtor encounters hardships such as permanent job loss, the credit card company may agree to lower the minimum payment amount. This is if the debtor communicates with the credit card company and explains his or her situation to them.
  3.  If you are a new credit card holder, the credit card company may offer to waive the annual fee that is due in the first year. To the credit card company, this can be overseen as they would like to retain you as a client.

 

 

Instances when credit card companies cannot settle:

  1. If you have been a card holder for a number of years, the credit card holder may not easily waive the annual fees that are charged to your account.
  2. If you have been in the habit of making late payments, your credit card company may hesitate to offer you a debt settlement agreement. This is because a new agreement will cancel the previous one, which was not being acted upon duly by you.
  3. If your situation does not justify the hardships that qualify for debt settlement, you may not benefit from getting credit card debt relief. The creditor will assess your situation and if it is found that you still have a steady flow of income and are able to pay off the amount owed after sorting your monthly expenses and utilities, you may probably not get debt settlement.
bankruptcy-worksheet

Filing for bankruptcy is not necessarily

As you can see, filing for bankruptcy is not necessarily the best option if you would like to get out of debt. If your conditions are those that may be considered for credit debt settlement, approach your creditor and explain your situation to them. Be polite but persistent in your approach, as there is a possibility of your request being rejected. Debt settlement is a better option and solution to avoid having your credit score affected should you fail to pay amounts owed over a period of 180 days. Remember, you have got nothing to lose by making your request but you may stand to lose it all if you hesitate on getting credit card debt settlement. Keep your records well as this will enable you to have the numbers on the tip of your fingers and present your case better.

Myths about credit card debt settlement

There are various myths that surround credit card debt settlement. A debtor may not tell apart the truth from these myths that are often told. The following are some of the myths associated with getting out of debt and the truth about credit card debt settlement:

You Need to pay someone so as to get yourself out of debt

You Need to pay someone so as to get yourself out of debt

Myth 1: You need to pay someone so as to get yourself out of debt.
Fact:
This is not often necessary in some instances. There is an increase in the number of debt settlement companies that are scams. Do yourself a favor and avoid losing more money to such scams. The situation is only well understood by you and you can negotiate the debt settlement terms for yourself. A debtor will put in more effort to get out of debt than one who is hired to do this. However, it is agreed that in some instances, it will be advantageous to have a negotiator or a payday loan debt settlement company.

Myth 2: An individual’s credit score will not be hurt by credit card debt settlement
Fact:
Settlement of debt, just like bankruptcy can affect your credit score. Although debt settlements and defaults may not influence your credit score if they are not reported, this is just a temporary situation. The truth of the matter is that debt settlements are normally reported, eventually.

Any individual with a good reason can get their credit card balance slashed into half

Any individual with a good reason can get their credit card balance slashed into half

Myth 3: Any individual with a good reason can get their credit card balance slashed into half
Fact:
There are underwriting criteria that are looked into so as to enable a debtor to have his or her credit card balance halved. Debt settlement companies and creditors will conduct a thorough screening to prove that one is experiencing the hardship that meets the underwriting criteria. A debtor experiencing hardships such as a divorce, temporary job loss and medical problems may get debt settlement.

Myth 4:  The debt will stay forever if I do not settle it
Fact:  
There are statutes of limitation in each state that limit the duration in which debt collectors may file lawsuits over credit card debts that are yet to be paid. Therefore, if a debtor has an unpaid amount over a number of years on a charge account, such a debt is not legally enforceable. This is because at such a point, the payment to be made will be considered voluntary and not in a debtor’s interest as negates the argument of the credit card debt collection limitation.

Myth 5: Filing for bankruptcy or getting debt settlement are my only options when I am unable to pay the credit card debt.
Fact:
These are options that are extreme, which may lower your credit score and you have other options such as getting forbearance. This is a situation whereby you may still be charged an interest on your loan, but you will be allowed to make payments in smaller amounts or to make no payment at all. Instances such as a job loss are considered for forbearance.

These are just some of the myths about credit card debt explained. However, if you find it challenging to settle your debt, do consider managing your finances well and be well informed on the options available to you.