Debt settlement is undeniably one of the most practical ways to reduce your debt especially if you are going through a financial hardship and can’t afford to make your monthly repayments. However, sometimes there are hidden fees and costs involved that can catch you off guard. If you want to maximize your financial benefit then it’s important that you first understand the debt settlement process and learn how to avoid unnecessary costs.
Today we will break it all down for you, including;
- What is debt settlement
- How much does debt settlement cost
- How can you avoid extra fees
- How to choose the right debt settlement company
Understanding Debt Settlement
Debt settlement is a financial strategy to reduce your debt. What happens here is that the borrower negotiates with the creditor to reduce the total amount of debt. In return, the borrower has to pay a lump sum of the total amount and the rest of the balance is forgiven. This strategy is used by people facing a serious financial hardship especially when they don’t want to declare bankruptcy.
It’s true that the process can reduce your debt but sometimes, it can become very expensive and it can negatively impact your credit score too. Moreover, this isn’t something that can reduce your debt overnight. Debt settlement can take anywhere between 2 years to 4 years so you need to stay consistent with your efforts and it’s best if you opt for professional help for better results.
How Much Does Debt Settlement Commonly Cost?
The cost of debt settlement depends on different factors like the company you choose, the total amount of debt and their fee structure. Here’s a breakdown that can help you determine how much does the process commonly costs;
Percentage Of Your Total Enrolled Debt (Most Common)
Most companies will charge you according to your total enrolled debt. For example, if you enroll $2000 in debt, you’ll have to pay the company somewhere between $2000 to $3000 as settlement fee.
Percentage Of Savings
Some companies will charge a fee based on the total amount you’ve saved through settlement. Mostly charge around 25% to 35% of your savings. For example, if you’ve successfully settled a debt of $20,000 for $12000, it means that you’ve saved $8000. As per this figure, the company might charge you around $2000 to $2800.
It’s rare for a company to charge based on your savings. It only happens in performance based models. You should expect your company to charge you according to the total amount of debt you’ve enrolled.
How To Avoid Extra Fees?
If you want to avoid any hidden charges or extra fees then here are some important tips that can come in handy;
1-Learn Everything About The Federal Regulations
As per the FTC (Federal Trade Commission), debt settlement companies are prohibited to charge any upfront fee before delivering results. If a company is asking you to pay any amount as an upfront fee, it’s best if you avoid them because the company is basically breaking the law. You should always review the fee structure in detail and ensure that it’s performance based.
2-Read The Fine Print In Your Contracts
Before signing up, it’s of utmost importance that you read and review the fine print in the contract in detail. Some debt settlement agencies try to embed their hidden or additional charges in the fine print. It can be in the form of administrative fee, monthly service charges or escrow payments. As a customer, it is your right to ask for the details of the items in the fee list. If the company isn’t willing to provide you with a detailed explanation then it’s best to walk away.
3-Opt For A Reputable Debt Settlement Company
The debt settlement industry is full of scammers so you must watch out for them. When choosing a debt settlement company, try not to fall for cheap fees or false claims. It’s not the kind of process you should rush into so take your time and ensure that you are hiring the right people for the job. A reputable debt settlement company will always be transparent when it comes to their fee structure, they’ll have a proper license to operate in the state and they’ll be accredited by organizations like International Association of Professional Debt Arbitrators (IAPDA) or the American Fair Credit Council (AFCC).
4-Always Try To Negotiate The Fee
While finalizing a debt settlement company, know that not every fee is set in stone. In fact, some companies do give their customers a margin to negotiate the fee especially when the debt is quite large. All you have to do is to ask. Sometimes, asking can save you hundreds and thousands of dollars so it’s important that you ask if there’s a chance to negotiate the fee.
5-Try DIY Debt Settlement
If you have good negotiation skills and your creditor isn’t too hard to handle then it’s best if you opt for DIY debt settlement. For debt settlement, it’s not necessary to involve a third party in between. Sometimes, some creditors are willing to negotiate directly with the creditor so you should give this option a try. Not only will it save you money, in fact, it’ll also help you take full control of the process.
6-Watch Out For Tax Implications
If your creditor is forgiving more than $600 of your debt then it’ll be reported to the IRS as taxable income. It doesn’t fall into the “fee” category but yes, this is an unexpected financial obligation for many people. It’s best if you work with a tax professional to understand your liabilities. Moreover, you should do proper research on the IRS 982 form and check if you qualify for an exemption.
How To Choose The Right Debt Settlement Company
Choosing the right debt settlement company is a crucial step. It can literally make or break your debt settlement journey. Ending up with the wrong company means more financial trouble. You must understand that where there are multiple reputable debt settlement companies, there are some deceptive operators too and you have to watch out for them.
Here’s what you can do to end up with the right professional company for successful debt settlement;
Check For Legitimacy: Ensure that the company has a proper physical office. It’s best if you choose the company that’s near your residence. This way, you can visit the company yourself and ask every question you want an answer too. Moreover, check for accreditations by reputable organizations like the American Fair Credit Council (AFCC) or the International Association of Professional Debt Arbitrators (IAPDA).
Research Their Reputation: It’s not so hard to check a company’s reputation nowadays. You can take help from platforms like Google, Yelp and Better Business Bureau. All you have to do is to check their ratings, customer reviews and performance track record. Also, experience does matter so always choose the company that has at least 5 to 10 years of experience in debt settlement.
Transparency And Communication: A reputable and professional debt settlement company won’t have to hide anything from you. They’ll be transparent when it comes to their fee structure, they’ll inform you about the consequences of the process too and they’ll be clear with their communication too.
Final Takeaway
Debt settlement can bring you the relief you’ve been wanting but only if you do it wisely. To avoid extra fees, it’s important that you first understand the process, hire the right people and learn their fee structure in detail. It’s important that you read the contracts carefully before signing up and if something feels wrong, it probably is so you should walk away timely.
FAQs
Q1.Are Debt Settlement Companies Safe?
Yes, debt settlement companies are safe but only if you choose the right ones to work with. The company you choose should be reputable and legally compliant. Most importantly, never work with a company that charges any upfront fee because as per the FTC, it’s illegal to charge a fee until the company delivers the results.
Q2.Will Working With A Debt Settlement Company Hurt My Credit?
Even if you opt for DIY debt settlement, it’ll still hurt your credit so it’s not the “company” per say. Debt settlement involves delinquent accounts and all the missed payments can bring your credit score down. Eventually, after you’ve successfully settled your debt, you can take certain measures to improve your score back.
Q3. How Long Does Debt Settlement Take?
Debt settlement can take anywhere between 2 years to 4 years but it also depends on multiple factors. For example, if you’ve already saved up enough to offer a reasonable lump sum to your creditor then you might be able to settle your debt within months.
Searching for the most professional and reputable debt settlement company in town? Try Mountains Debt Relief to spot the best debt settlement service providers that’ll help you regain your financial control.