Debt can become a really heavy burden especially when multiple creditors are involved and your interest is piling up at the pace of a skyrocket. The current economic situation isn’t up to the mark and nowadays, it’s really getting difficult for people to meet their day to day expenses. On top of that, there are fewer employment opportunities than before and jobs aren’t paying as well as they used to. In such a tough financial situation, it makes sense that debtors often get stuck with overwhelming amounts of debt and even if they want to, it’s impossible for them to pay it off.
Fortunately, debt relief options like debt settlement are there to help people in despair. It’s true that debt settlement is the best financial strategy one can use in such a tough situation but without proper budgeting, even the best of your deals can fall through. In order to regain control of your financial life, it’s important that you first evaluate your finances and make a proper budget for a successful debt settlement.
What Is Debt Settlement?
Debt settlement is a financial strategy where the debtor negotiates with the creditor to accept a lump sum payment that’s less than the total amount due. In exchange, the creditor forgives a portion of the debt and the debt is then considered “Settled”. This strategy is usually used for unsecured debts like credit card bills, medical bills and personal loans.
A settlement can help reduce your debt obligations but you first need to have a substantial amount ready to pay upfront. This is why careful budgeting is of utmost importance and before beginning the negotiation, you first need to have a proper plan!
Step By Step Guide On How To Budget For Debt Settlement?
1-Evaluate Your Financial Situation
It’s not just for debt settlement, in fact, budgeting is important for almost every financial aspect of your life. The very first step is to evaluate your financial situation in detail. You should always have a clear picture of your financial health before you start a debt settlement negotiation.
Track your income: you should track all your income sources including your salary, your side hustle, your passive income or even government benefits. When you know the exact amount that you earn every month, it’ll become very easy for you to set the foundation for your budget.
Make a list of all your expenses: the main and the most important part of budgeting is to first identify your expenses and where all your money goes. Identify your fixed expenses (rent, utility, mortgage), discretionary expenses (hobbies, dining out, subscriptions) and your variable expenses (gas, entertainment, groceries). It’s best if you use a spreadsheet to jot down all your expenses.
2-Prioritize Your Debts
If you are dealing with multiple debts then it’s best if you first make a list of the debts, mention the name of the creditors, the total amount you owe, the interest of each debt and the minimum monthly payment. Once done, you should then prioritize your debt and deal with the ones first in collections, those close to the charge off status and the ones with high interests. Creditors are more likely to settle these debts.
3-Create A Realistic Budget For Each Month
Structuring a budget in order to save for your debt settlement negotiation is the most crucial step of the process. Normally, for budgeting, there’s a 50/30/20 rule. 50% of your income should be for your needs, 30% for your wants and the rest of the 20% should be your savings. Now, when you are dealing with multiple high interest debts, you should change the percentages a bit and follow a 60/10/30 rule. In this rule, 60% should be for your needs, 10% for your wants and the rest of the 30% should be saved for debt settlement.
Open a savings account for your settlement fund and start depositing your savings into that account every month. In order for consistent savings, automate the payment. Ideally, you should aim to save around 30% or 60% lump sum of your total debt because that’s the percentage creditors usually agree on.
4-Cut Down Your Costs And Increase Your Income
At the end of the day, budgeting is all about saving more money and increasing your income. To save money, you should cut down your non-essential spendings like subscriptions, eat out less and only shop when needed. You can also reduce your fixed expenses like move out to a smaller space with lesser rent, negotiate your phone and internet bills and refinance your loans. Lastly, in order to increase your income, you can sell your unused items, take a side hustle or start freelancing as it can really help you save more in the long run.
5-Start Your Debt Settlement Negotiation
Once your budget is in place and you’ve saved up enough to settle your debt, it’s time to contact your creditor and make an offer. You can either settle your debt with your lender yourself or use third party debt settlement services. It’s best if you seek help from a professional settlement company like Mountains Debt Relief. You see, debt settlement is a complicated process and it can really drain you. In such a situation, you should use professional help from a company that has the required experience and expertise in this field.
In case of DIY debt settlement, here are some negotiation tips that can come in handy to you;
Start low: Your creditor will most probably reject your initial offer as he would want to recover as much of his money as he can. This is why you must start with a low offer like 30% of 40% of the total loan amount. If the creditor rejects, you can make a counter offer and you both can probably come to an agreement that benefits you and your creditor.
Get the agreement in writing: Debt settlement is a professional negotiation and every detail of the agreement must be documented. From the total amount to the lump sum decided and the timeline for settlement, ask your creditor to provide all the details in writing.
Pay Once The Deal Is Confirmed: Don’t make any payment until the deal is confirmed. Again, it can only be considered confirmed when it’s all presented in written form. Once you have the proper document of the contract, that’s when you should make the payment.
6-Adjust And Monitor Your Budget
Debt settlement isn’t the kind of process that you set and forget. In fact, if you want a sound financial future then it’s important that you keep monitoring your budget and make changes to it whenever you feel the need to. What’s more important is that even after debt settlement, you should still continue to save money every month and set it aside as your emergency fund. You never know when you’d need that amount again and it’s better to have your own emergency fund instead of taking up another loan and getting stuck with it.
Final Thoughts
If you want to become a pro at budgeting for debt settlement then you first need to practice discipline, patience and learn how to use the right strategies at the right time. For budgeting, you need to have a clear picture of your financial situation, you have to set your priorities straight and take control of the debt rather than neglecting it, letting it pile up. Whether you are opting for DIY debt settlement or hiring a debt settlement company, a well thought out budget is of utmost importance to achieve your financial goals. In fact, even if you aren’t dealing with any debt, it’s still important to manage your finances and follow a proper budget to ensure future financial security.
FAQs
Q1. How Much Do I Need To Save Monthly For Debt Settlement?
There’s no right answer that fits all. In fact, it depends on your total debt and the timeline of the settlement. Ideally, you should save between 40% to 60% of your total loan amount over a time period of 12 to 36 months.
Q2. Will Settling Debt Hurt My Credit Score?
Yes, debt settlement does impact your credit score negatively and it stays on your credit report for 7 years. However, the good part is that this damage is temporary and you can immediately start recovering your credit score after a debt settlement. All you need to do is to show a financially responsible behavior, spend less of your credit and pay your bills timely.
Q3. Is Debt Settlement Taxable?
Yes, if your creditor has forgiven more than $600 debt then the IRS considers it taxable income. When you receive the tax notice, it’s important that you take immediate action because ignoring it can cost you a lot.