When you are dealing with multiple debts or one huge loan, things can get a little troubling for you especially if you aren’t able to afford the repayments. Delayed or missed monthly payments come with several unwanted consequences like it will impact your credit score negatively or in the worst case scenario you might be charged extra on late repayments. In a nutshell, you should only consider taking a loan if you really can afford to pay it back with complete commitment.
Now, due to any unfortunate circumstances, if you’ve taken up a loan but can’t pay it off, you’ve got two options. First is debt consolidation and the second one is debt settlement. Today we are going to talk about the latter.
Introduction To Debt Settlement
Debt consolidation means taking up a new bigger loan to pay off the rest of your creditors. However, debt settlement, as the name implies, means “settling your loan amount”. In debt settlement, instead of declaring complete bankruptcy, you just involve a third party and negotiate your remaining loan amount with the creditor.
It’s more like an agreement between the borrower and the creditor in which a reduced payment to the lender means complete payment. It’s like you are asking for debt reduction and it clearly is the wiser move when you fall short of money to pay off your loan completely.
Now, most people prefer settling their debt themselves without the involvement of any third party but it’s a bit risky and there are chances that you won’t be successful in it. The best thing to do here is to hire a debt relief company, learn what is debt settlement work in detail and let the party do the job for you. Of course, you’ll have to pay a small fee to the company for settling your loan with the creditor but at least it will get your job done so it’s definitely worth it!
How Debt Settlement Works- A Step By Step Guide
If you are new to the whole concept of debt settlement then this really is the right place for you. Let’s review some of the main steps involved in this process to make it further easier.
1-Review Your Situation
You first need to jot down all the details of the total amount that you owe, your creditors and most importantly, the types of debts.
2-Make A Budget
It goes without saying that even for debt settlement, you’ll need to set aside a lump sum amount no matter what. For this, it’s important to have a budget where you calculate the amount that you can afford to pay to settle your loan. You have to consider your monthly income here and deduct your expenses like your mortgage, bills, food and entertainment.
3-Negotiating With Your Creditors
Whether you hire a debt settlement company or do it yourself, in any case you’ll have to talk to your creditors and be ready to show some persistence because there are high chances that your creditor may not agree with your plan. You just need to have some good negotiation skills for this step. Most importantly, remember to always start low before you agree to an amount.
4-Get A Written Agreement
You need to get it all in writing. This is the most crucial step of the deal. Ask your creditor to mention everything in detail along with the terms and conditions of the deal to avoid any future legal issues.
5-Commit To The Deal
To avoid any unwanted circumstances, you need to stick to the deal and make your payment right on time as decided with your creditor. Mostly the lenders settle for 40% to 80% of the complete amount owed but it obviously depends on the person you are dealing with.
Advantages Of Debt Settlement
It Will Reduce Your Outstanding Debt Amount
One of the best things about debt settlement is that it will reduce the amount you owe your creditor. For example, if you owe $30,000 to your lender and if you both agree on settling the debt then chances are that you’ll only have to pay him $24,000. It just all depends on the deal you both agree on.
It’s Best For Avoiding Bankruptcy
You won’t have to file for bankruptcy. Bankruptcy can stay on your credit report for more than 10 years and it will impact your employability too. So the wiser move here is to settle the debt instead. The best part is that you won’t have to deal with any more collection calls from your creditor. No more burden and pressure to pay the complete debt back. This way you’ll have more room to grow and save more money in the future.
It’s Better For Your Credit Score If You Negotiate Well
Debt settlement work can have a huge impact on your credit score but it’s still better than defaulting. Moreover, if you somehow manage to convince your creditor to mark the “settled” debt as “paid in full”, it won’t have any negative impact on your credit history.
The Downside Of Debt Settlement
There’s No Guarantee
Whether you try to settle your debt with the creditor yourself or hire a company for it, there’s no guarantee that your creditor will agree on reducing your debt. In fact, according to research the success rate in debt settlement work is just 10%.
Your Creditor May Take A Legal Action
Your creditor can put you in a legal bind when you are trying to settle your loan amount. Especially if you hire a third party here, the creditor can enlist the help of collection agencies or in the worst case scenario you might end up with a legal lawsuit.
Your Credit Score Will Suffer
As said earlier, there are always some repercussions to consider when you are in such a situation. One of the biggest drawbacks of debt settlement is that it will have a negative impact on your credit score and that really can put you under several restrictions.
Accumulation Of More Debt
If a debt settlement falls through and you aren’t able to meet the agreement then you can end up into an even bigger debt that what you owed initially. In simpler words, when you are going to settle your debt with the creditor, you first need to ensure that you really can afford to pay the amount that you are mentioning in the deal.
You’ll Have To Pay Some Fee
If you really want the settlement agreement to go through then hiring a third party is the wiser move here. However, when you hire a debt relief company to deal with your creditor and your whole situation then of course, they’ll also charge you a fee for it. Most companies charge a certain percentage of the settled debt once they reach an agreement with the lender.
What Are The Alternatives To Debt Settlement And What’s Better?
It’s important to first go through all the options available when you are in a financial rift. Yes, debt settlement really will work wonders for you but only if it all goes smoothly. One small mistake can lead you into hot waters so consider all the alternatives first before making a final decision.
Negotiating With The Lender Yourself
In such a situation, people are usually afraid to talk to the creditor themselves but guess what? Sometimes it’s all as easy as just picking up the phone. To avoid paying any additional fees to the third party, it’s always better if you try to talk to your lender yourself. If you are going through financial hardships for unavoidable reasons then there are chances that your creditor will make some sort of an arrangement for you so that you don’t default.
Debt Consolidation Loan
The debt settlement vs debt consolidation debate is always a little tricky to understand. There’s no clear answer that tells what’s better for you as it all depends on the amount you owe and the amount you can manage to pay. In simpler words, the right move varies from person to person. In debt consolidation, you basically take up a new big loan to pay off your creditors. This basically cuts down your interest cost and makes repayments more manageable. These loans are more like installment loans that come with a fixed interest and a fixed repayment term.
Using A Balance Transfer Credit Card
Some credit cards offer an introductory period to cardholders where they charge 0% APR on the funds you transfer. In short, you don’t have to pay any interest on the transferred funds and you’ll also be able to clear your creditors without any hassle. Now, the trick here is to first qualify for such a card and before you choose one, it’s important to first compare all the cards and see which one suits your situation the best.
Opt For A Credit Counseling Company
If none of the above options work for you then it’s best to hire a counseling company for you that will save you from all the hassle and do all the debt management for you. These counselors basically help consumers manage their finances, their debts and they help avoid any future financial crisis.
They will also be responsible for talking to your creditor and settling the debt for you without any negative impact to your credit score. The downside here is just that you’ll have to pay the company a fee for their services. If you can manage to afford it then let a third party take the pain for you.
Common Myths About Debt Settlement
If you don’t want to hurt your financial situation and credit history anymore then here are a few debt settlement myths that you need to know about;
Only a collection agency can negotiate with your creditor: One of the most common misconceptions that people believe is that they would always need a debt relief company for debt settlement work. These companies will claim that they possess unique qualities to negotiate with your creditors but that’s not true at all and there’s no guarantee if their deal goes through or not. If you don’t want to pay any fee to any company then it’s better to talk to your creditor directly.
You have to pay an upfront fee to the debt relief company: If for some reason you can’t do without involving a third party in between then know that you don’t have to pay any fee upfront. You just have to pay them once the debt is settled otherwise, as per the federal law, debt relief companies aren’t allowed to charge any fee until the job gets done.
Declaring bankruptcy is the better solution: In such an overwhelming situation, people often look for the easiest solution but know that bankruptcy isn’t one. It’s clearly going to put you into an even messier situation because it won’t go off your credit history for at least 10 years and that will limit your access to credit in the future.
You don’t have any other options: If for some reason your creditor isn’t agreeing on reducing your debt and settling the amount then know that there are several other alternatives. Debt consolidation is the best alternative to debt settlement and even if that doesn’t work for you then try getting a debt management plan and consult a financial counselor to help you get out of this messy situation.
Legal And Financial Implications Of Debt Settlement
Someone who’s already under debt and can’t even afford to pay that back doesn’t want any more trouble especially if it’s a lawsuit. In debt settlement, if you don’t do things the right way, you can end up in legal trouble which is why it’s important to consider these crucial factors;
Make Sure To Comply With The Regulations
There are some consumer protection policies stated by the federal and state authorities that are a must-follow for every debt relief company. There should be complete transparency in communication and you need to avoid any deceptive or unethical practices no matter what.
Clear Communication
Transparency is one of the most crucial things between a consumer and a debt relief company. The company should inform each and every detail to the consumer, including the consequences of debt settlement, the possible legal actions and most importantly, its impact on the credit score.
Legal Implications
When you opt for debt settlement, you have to be prepared for any kind of legal actions that your creditor can take against you. This does happen and lenders file lawsuits to recover their outstanding balances so your debt relief company needs to be prepared ahead. The company should have complete know-how about the legal processes involved and it should provide proper guidance to the consumer.
How To Get Started With Debt Settlement
Earlier, we’ve mentioned the complete process of how does debt settlement work and what pathway you need if you are planning to negotiate with your creditor all by yourself.
If you don’t want to take the pain yourself and are afraid of getting rejected for settlement then hiring a debt relief company really is the best option left. There are several fraud companies out there that you need to be careful of. These are the factors to consider when choosing a third party for debt settlement;
1-Shop Around And Compare Fees
Although you might be in a hurry to just settle your debt down and free yourself from all the burden and stress. But even in such a situation you should always first shop around, compare the fee and ensure that the company you choose doesn’t charge any upfront fee.
2-Check Out The Track Record Of The Company
With the internet, you can now easily check any company’s track record without any hassle. Search the company online, check its reviews and ratings and most importantly check with your state attorney general’s office to see if someone has ever filed a complaint about the company that you want to work with.
3-Ask Questions
When you are hiring a company for a service, you are first supposed to ask them each and everything in detail. Don’t shy away from asking questions if you don’t want to end up in trouble. Ask them how they are going to settle your debt with the creditor, what’s their process and how long would it take?
FAQs
Q1. What Percentage Of Debt Is Usually Accepted In Settlement?
The amount varies from creditor to creditor but as per the American Fair Credit Council, debt accounts usually settle for around 33% less than what the borrower owes.
Q2. How To Remove Debt Settlement From Credit Report?
When you settle your account with your lender, ask if he can mark your debt as “paid in full”. If not this then you can’t remove the “settlement” mark off your credit report at least for the next 10 years and it will negatively impact your score too.
Q3. Can I Apply For A Credit Card After Debt Settlement?
It all depends on how bad your credit score was before you settled your debt. Sometimes it takes people more than 24 months to improve their credit score. People sometimes have to wait years to get a credit card after debt settlement.
The Bottom Line
If you’ve already exhausted your repayment options and can’t really find a solution then hiring a debt relief company really is the right thing to do here. Debt settlement work is a risky task but if you manage to lock a good deal with your creditor and stick to your commitment then this can turn out as the best financial decision of your life. For financial assistance and the best debt relief counselings, try Mountains Debt Relief. Gain complete financial control in no time! Contact Now!