What is Debit Settlement?
Debt settlement is a negotiated agreement when a lender accepts less than the full amount owed to legally settle a debt. If you are faced with a tremendous amount of debt that you simply aren’t able to keep paying or won’t reasonably be able to pay off in a timely manner, debit settlement may be an option for you. It can be a viable alternative to bankruptcy. Understanding how it works and the implications are important.
How does Debt Settlement work?
Private debt settlement companies
These are for-profit entities that charge a fee of 15%-25% of the debt the company is originally asked to settle, or the lower settlement amount. When you enter into an agreement with a debt settlement company, you will be asked to stop making payments to your creditors. You will then make payments to the company, which go into an escrow account and include the company’s fee. Meanwhile, the company will negotiate with your creditors to settle for a lower amount. Once you’ve paid the amount the agreement is for into the escrow account, the debt settlement company will pay your creditor. This process can take 2-3 years.
Handling yourself
Rather than using debt settlement company to negotiate and manage payments on your behalf, you can also do this yourself. You will need to contact your lender and propose a reduced payment option. All credit card companies have someone who speaks with customers about options for reduced payments. They will want to know why you are doing this (i.e. job loss or other hardship). They also generally don’t begin negotiating with you until you are past due on your payments by 90+ days. Should the lender propose an option to you, they will usually propose a single lump sum payment or a scheduled payment reduction schedule. The later you are on your bills, generally the more they are willing to discount the balance.
Pros and Cons of Debt Settlement
Debt settlement can relieve you of the stress with excessive debt, however it is not an easy road. You will need to stick to an agreed payment schedule or follow through on a lump-sum payment. There are also some big risks and negative consequences.
Ultimately, you will need to weigh the pros and cons and determine if debt settlement is the right option for you.
Pros of Debt Settlement
– Balance owed is reduced, sometimes by as much as 50%.
– You avoid having to file bankruptcy
– Debt Collectors will stop calling you.
Cons of Debt Settlement
– Fees with Debt Settlement companies can be very high. Often the total amount paid is not too much less than your original debt. Doing it alone can be much cheaper
– Your Credit Score will take a massive hit, Expect to have your score drop to ‘Poor’ credit status (Less than 580)
– You will need to pay income tax on the amount forgiven. This isn’t something that is often shared.
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