What is debt settlement? Often referred to as debt negotiation, debt settlement occurs when an agreement between a creditor and debtor settle an outstanding debt for less than the principal balance owed (i.e. settle a $10,000 debt for $4000).
Choosing debt settlement can reduce the amount of debt you owe in total. However, there is a downside you should be aware of. Keep reading to find out about some things you should know before deciding if debt settlement is the best option for you.
Debt settlement is legal process by which you negotiate the balance with your creditors to a lower amount. But in order to do so, you must show you are having a financial hardship. And that means falling behind on payments. And when you fall behind on payments, your credit score will decrease.
If you're wondering why a creditor would agree to settle an account for less than owed, here's the answer. Many consumers accumulate substantial credit card debts and stop making payments indefinitely. This is a calculated loss the credit card companies anticipate for a given amount of debtors.
Usually after months, even years of missing creditor payments, the consumer has saved enough funds for the debt negotiator to facilitate a debt settlement. And once the settlement is paid out, your credit report will often reflect something like "settled for less the owed" or something along those lines.
On the brighter side, debt settlement will look much better on your credit report than a bankruptcy filing. It is recommended that you try to clean up your debt all at the same time, so that in a few years your slate will be completely wiped clean.
During the process of seeking out a company to help you with your debt settlement, you will probably encounter several claims that they can save you anywhere from 40% to 60% of your total debt. These figures are not guaranteed, but only estimates. No company can guarantee a debt settlement or specific savings.
Your very first time attempting to acquire a settlement with a creditor will probably not be successful. It takes time and it takes effort on your part, dragging on for a few years at times. Don't approach the situation expecting to be rid of half your debt in just a week.
The core benefit of successfully negotiating a debt settlement is paying off the debt at a fraction of the balance, in a relatively short period of time. That's the obvious goal. However, there are negative consequences consumers should be aware of prior to engaging in a debt settlement service. As mentioned before, in order to create the appropriate environment for debt settlement negotiations, you have to fall way behind on creditor payments. Otherwise the creditors are not likely to negotiate a settlement. And this has negative consequences.
Most debt settlement services are affordable compared to what you pay in minimum monthly payments as dictated by the creditor. Many companies can charge up to 25% of the debt, in addition to monthly fees. Unfortunately, many debt settlement companies thrive on people's desperation and don't implement a service that's in the best interest of the consumer. So make sure before you hire a debt settlement company, make sure you read and understand the contract thoroughly.
Despite any of the things discussed here it is still hard to ignore how effective debt settlement can be when facilitated appropriately and ethically.
Another negative consequence of falling behind on debt payments is that you will receive numerous debt collection calls. There are two general types of debt collectors; collectors who work for the original creditor and collectors who work for third party organizations that purchases debt from original creditors.
If you do not have funds available to make a settlement offer, then you may want to consider filing for bankruptcy. By filing bankruptcy, you can stop lawsuits and wage garnishment. When considering bankruptcy, certainly speak with a licensed bankruptcy attorney for detailed information.
To understand your legal consumer rights regarding debt collection, you should familiarize yourself with the Fair Debt Collection Practices Act. The FDCPA is federal law that protects consumers from harassment and abusive collection methods. Please note, the FDCPA applies to third party collectors who have purchased accounts or been hired by an "original creditor" to collect on a debt. Original credit institutions are not required to abide by the provisions set forth by the act.
