 What is Debt Settlement?
Debt settlement, debt negotiation and debt arbitration amount to the same thing. Unlike debt consolidation, whereas you pay off 100% of your debt and more, debt settlement companies actually negotiate with your creditors to reduce the amount of money you owe them.
How Does Debt Settlement Work?
Participants in a debt settlement program make the independent decision to stop making monthly payments to their creditors. (Debt settlement companies can not legally tell you to stop making payments to your creditors because it interferes with an existing contract. You must decide to do this on your own.) Instead, clients are encouraged to save money into a settlement account. Putting money into a settlement account has two effects.
First, since your monthly income is no longer going to creditors you have instant positive cash flow! This means you can save a significant amount of money in your settlement account very quickly.
Second, withholding payment actually increases the strength of your negotiating position with your creditors. Remember, creditors have no reason to negotiate with you if you are current on your accounts.
While you are saving money in your settlement account the debt settlement company is busy negotiating with your creditors to reduce your TOTAL debt amount. Reputable debt settlement companies will get all agreements made with your creditors in writing and send them to you for final approval. When you decide to accept an offer you will send a lump-sum settlement payment directly to the creditor out of your settlement account.
When Is Debt Settlement A Good Debt Relief Option?
Debt settlement is appropriate for people who have a real hardship. You have a hardship if you struggle to make payments, consistently late on payments, and/or afraid to pick up your own phone because collection agents have been calling you. Debt Settlement is NOT for people who just want to avoid paying their bills. Debt settlement is for people who want to deal HONARABLEY and ETHICALLY with their creditors to free themselves from debt on terms that are favorable to YOU. That said, good debt settlement companies can usually settle your debt for around 40 cents on every dollar you owe at the time of settlement. That means a hypothetical $10,000 debt can be settled for $4,000.
Why are creditors willing to settle 40 cents on the dollar?
It is true that creditors are under no obligation to settle your debts for less than you owe; however, it is also true that if you file bankruptcy the creditors will likely get nothing. Creditors have an incentive to settle because they want to get as much money out of you as they possibly can; even if its means settling with you for less money than you owe. If you think about it debt settlement is a fair and logical conclusion to your debt. You get to reclaim your financial future and the creditors get paid a fair amount.
What are the drawbacks of Debt Settlement?
Although debt settlement can be the fastest and least expensive way to get out of debt, there are still some drawbacks.
The IRS considers a forgiven debt as income.
You may have to pay taxes on the debt amounts settled unless you file the appropriate waiver (IRS FORM 982 - Reduction of Tax Attributes Due to Discharge of Indebtedness) with the IRS. If you are concerned about debt settlement's tax consequences you should discuss them with a qualified tax specialist before starting a debt settlement program.
You may get calls from your creditors.
Once you stop making monthly payments to your creditors they will likely increase their collection efforts. Most debt settlement companies will give you effective tools and strategies for handling those calls, but it can be a little nerve racking at first. A collector will say just about anything to get you to resume monthly payments. Despite that, you have to be committed to the debt settlement process to get the benefits of the program.
Your credit rating may suffer.
The effect debt settlement has on your credit score varies depending on your current status with creditors. If you have already been late or missed payments your FICO score may post very little change, but if you have never missed or been late on a payment your FICO score will plunge.
Most debt settlement clients should expect that the part of their FICO credit score that relates to payment history to go down, but eventually their score should return to their current state (or counterbalance), as their debts get settled and their debt to income ratio increases. Many debt settlement clients report that their credit score actually increased once they completed the program, but a reputable debt settlement company can not make that guarantee.
Remember, your credit score is used to determine your ability to take on more debt at a given moment. This means that your rating will always fluctuate up and down depending on your current situation at the time the score is given. One good test to see if debt settlement is right for you is to ask yourself this simple question. "Which is more important to me during the next three years: Getting out of debt or preserving my credit score?" If you chose "preserving your credit" score then you should probably consider another debt relief option.
Creditor's may decide not to settle your account and sue you.
It is possible that a creditor will choose not to settle your debt and sue you. This is unlikely to happen, but IT DOES HAPPEN! If your creditor wins the case a judgment will be filled against you. In some states your wages can be garnished to pay off judgments.
If you are sued a reputable debt settlement company will refer you to a qualified attorney. The debt settlement company should also offer to work with you to negotiate judgment amounts.
With the risks why should I consider debt settlement?
The only way to avoid risk completely is to pay all your bills in full on time, but on this web site we assume this is impossible; therefore, is is not an option. Debt Settlement, Debt Consolidation, Consolidation Loans and Bankruptcy all have varying degrees of risk and rewards. We encourage you to study your options so you can make a decision that is right for you.
Remember, the goal of debt settlement is to get you out of debt the fastest way possible for the least amount of money so by its very nature debt settlement is an aggressive approach to debt reduction. That is why debt settlement should be reserved for people with serious credit issues who might otherwise consider bankruptcy or a debt consolidation program.
How much does debt settlement cost?
Reputable debt settlement companies are paid a flat fee based on the total amount of debt entering the program. That fee is paid in a lump sum or broken down into monthly payment.
Stay in Control
Only you should have access and control to the funds in your settlement account. Do not let the debt settlement manage your account for you. YOU should pay your creditors and the debt settlement company directly out of your own settlement account. Additionally, you MUST get all agreements from the debt settlement company and creditors in writing.
You must stay committed
Collectors will say just about anything to get you to resume monthly payments. For debt settlement to work you must have the discipline and emotional strength to save the right amount of money into your settlement account EVERY month...no matter what the collectors tell you.
Remember your motive
Debt Settlement may NOT be for you if concerned about increasing or preserving your lines of credit. Debt Settlement is the fastest and least expensive way to get debt relief, but it is only for people whose primary focus is to become debt free and stay debt free. |
