Debt Consolidation Programs: Debt Settlement
If you’re knee-deep in debt and having trouble making even minimum payments to your creditors, debt settlement may be your best option. With debt settlement, you are able to negotiate with your creditors to pay for only a portion of your total debt and have the rest forgiven.
Here are a few facts about debt settlement.
What is Debt Settlement?
Debt settlement is useful when debt consolidation programs and negotiating payment plans with your creditors just don’t work. A debt settlement company can negotiate with your creditors to settle your debts for less than you owe.
Most unsecured debts can be handled by a debt management plan including:
- Credit card bills
- Medical bills
- Gas/store card bills
- Personal loans
How Does the Consolidation Service Debt Settlement Work?
For an upfront fee, a debt settlement company can negotiate with your creditors to settle your debts for 40-60% of what you owe. The remaining balance will be forgiven, and your creditors will consider your accounts paid off.
A debt settlement company will first have you stop making payments to your creditors. Then they will create an account for you into which you will deposit a set amount of money each month. All collection calls from your creditors will also be redirected to the settlement company.
Once your account reaches a certain level, the debt settlement company will begin negotiating with your creditors one-by-one. Based on the funds available in your account, they will agree on a settlement amount for roughly half of what you owe. This process will then continue until all of your creditors are paid off.
Pros and Cons of Debt Settlement
The biggest advantage of debt settlement is that you have a real chance of getting out of debt by significantly reducing the amount you owe to your creditors.
Other advantages of debt settlement include:
- Avoiding bankruptcy
- Making only one payment each month
- Eliminating late or over-limit fees
- Avoiding legal action by your creditors
- Protection from unfair collection practices
As with debt consolidation programs, there are also some disadvantages to debt settlement. Your creditors may report your accounts as settled rather than paid off in full. If you don’t get a written statement from them showing that you no longer owe anything, the remainder of your balance may be sold off to a collection agency. In some cases, the IRS may consider the money you saved by settling your debts as a form of income.
How to Choose a Debt Settlement Company
The first step in choosing a debt settlement company is to find out how much the service costs. If you can’t afford the upfront fees and monthly payments, you can do yourself more harm than good by working with a debt settlement company.
Next, make sure your debt settlement company offers a service guarantee. Not all of your creditors will agree to settle your debts for less that the full amount. A good settlement company will not charge you fees or refund you if they fail to settle your debts.
Finally, find out if your debt settlement company offers any bankruptcy assistance. In the event that your debts can’t be settled, some companies will refund a portion of their program fees to a licensed bankruptcy attorney who can assist you.