Ara Betty is a freelance financial writer and speaker about personal financing. She helps people realize their goals on becoming debt free with the use of debt consolidation. She hopes to expand her knowledge more about loans and debt to be able to write a book.
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?
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?
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?
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?
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
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.