What is debt settlement and how does it help the debtor?
If you are overburdened with debt and are trying to come out of it fast, then you may consider debt settlement program. It refers to the process of negotiating with the creditors, so that they accept an amount less than the full debt owed. It is probably the best option for you if youï’re not even able to afford lower monthly payments on your debt.
Debts that can be settled
Debt settlement is really helpful to get rid off unsecured debts, which are listed below.
- Debt on your credit cards
- Your department store credit card debts
- Debt on your hospital and medical bills
- Your gas or oil card debts
- Past due utility bills
- Unsecured personal loans
- Your overdue rent
Debts that cannot be settled
Youï’ll not be able to settle the following debts through the program.
- Your student loans
- Income Tax payments
- Secured debt (mortgage and car loans)
Right time to go for settlement
You can settle your debts, when you are facing any of the following situations.
A) You have a huge debt amount.
B) Your debts are increasing because of high interest rates.
C) Late penalties are getting accumulated on your debt.
D) You are not able to pay lower monthly payments.
E) Monthly earning is less than your total expenses.
How debt settlement works
After you enroll in a settlement program, the professional debt negotiator (on behalf of the settlement company) starts analyzing your financial situation. He determines how long you need to be a part of the program in order to clear your outstanding debt. The negotiator asks you to stop paying your creditors. Instead, he decides on an affordable monthly amount that you should deposit into your settlement account. In the meantime, he also starts communicating with your creditors to reduce your payoff amount. As soon as your creditors agree to a specific amount, you need to pay them from the funds that you have accumulated in your settlement account.
Advantages of a settlement program
Debt settlement program offers a number of advantages that are discussed below.
1) You’re able to avoid bankruptcy.
2) You can avoid lawsuit and other legal actions.
3) You can reduce your debt amount to 40-60% of the balance.
4) You’ll take much less time than other debt relief options.
5) You’re able to get rid of late payment and over-the-limit fees.
6) You can avoid harassing calls from collection agencies.
7) You need to make a single monthly payment.
Consequences of settlement
In spite of the fact that settlement has a number of advantages, yet you might have to face the adverse effects as well. The consequences of a debt settlement program are talked about in the following lines.
a) Negative credit ratings on your credit report.
b) Creditors may sue you when you stop payments.
Cost of settlement services
The settlement companies may charge certain fees (usually about 15-18 % of your total debt), for offering their program. A number of companies ask for about 25% of your savings (in the settlement program) along with an upfront fee and monthly service charges.
Do-it-yourself debt settlement
You can save the money that you need to pay as a debt settlement fee, if you can settle the debt yourself. At first, you need to accumulate a certain amount of money in your settlement fund and then start communicating with your creditors to reduce your total debt amount. It is better to negotiate with one creditor at a time. As soon as you finish settling your debts with one creditor, move on to settle your debt with another. In this way, you will be able to clear your debts and also save yourself from paying any charge to the settlement company.
Despite the disadvantages of debt settlement, it is still considered to be a better option than filing bankruptcy. However, if youï’re taking any professional help, make sure that the negotiator is an expert, who can bargain for maximum deduction in your debt settlement.
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