DIY Debt Settlement vs. Using a Debt Settlement Company

The Great Recession of 2007 left many people seriously underwater and facing financial disaster. Debt settlement turned out to be the equivalent of a life raft for a lot of these people. It’s not known how many people used debt settlement in the past nine years, but it’s known that thousands did, and in doing so saved millions of dollars, and averted bankruptcy.

The two options

If you’re seriously behind on your bills and can’t see any way to get caught up then debt settlement could be a good alternative.

The two types of debt settlement are DIY debt settlement and using a debt settlement company. In both cases, you would save money and get your debts paid off. So, the question is which of these options would be your best choice.

DIY debt settlement

This, as you can tell from its name, is where you settle debts yourself. It has several advantages. For one thing, some creditors may go easier on you and settle for less when they know they’re dealing with an individual and not a company.

Second, settling your debts yourself kind of forces you to organize and prioritize them, and face why it is you’re in so much debt.

You will save even more money when you settle your own debts since you will not be paying a debt settlement company.

You will be your only client

Debt settlement companies generally have hundreds of clients. When you handle the settlements yourself, you’re in complete control and are always your number one priority.

Using a debt settlement company means transferring a set amount of money each month to a trust account until all of your debts have been settled. In comparison, when you settle your own debts you have more flexibility. You get to decide which lender gets paid in what order and how much you will settle for.

The advantages of a debt settlement company

When all is said and done, most people choose to use a debt settlement company. There are several reasons for this. The biggest is that it eliminates the need to have the money available to pay for DIY debt settlements. The only way to successfully settle a debt is if you can make lump sum payments to your lenders to settle your debts. Let’s assume you owe $18,000. It’s possible you could settle those debts for 40% of your balances, but this means you’d need to have $7800 available to make the lump sum payments. And most people struggling with debt generally don’t have enough cash available for this.

There can be a lot of emotion involved if you’re negotiating with lenders yourself. In fact, negotiating with a lender can be a scary, as well as a long, drawn-out, experience. You may not be fast on your feet verbally or a good negotiator. When you choose to use a debt settlement company, it takes the burden of doing the negotiating off you. Plus, professional debt settlement counselors are generally able to negotiate better settlements than you could.

One set payment

As noted above, when you have a settlement company, you will not be required to make payments to your lenders. Instead, you would transfer a fixed amount of money each month to an FDIC-insured account that you manage. When enough money has accrued in your account, the settlement company will then begin negotiations with your lenders. The negotiations will continue until all of your debts are settled.

You won’t have to worry about anything

If you’re typical, you will have six debts to settle. If you figure several calls a day regarding each debt, you can see how quickly things could get crazy. You will need to take notes, remember the details of the offers you made, and the counter offers you received, and stay in contact with your lenders. All this goes away when you use a good debt settlement company. It will handle all these details for you, and keep you informed of how negotiations are going, so you will always know exactly where you stand. Your only job will be to sit back and relax, knowing your debt problems are in good hands.

It will cost you

Debt settlement companies are for-profits and charge for their services. Most charge a percent of the debt being settled. This can range from 15% to 25%. Going back to our example of $18,000 in debt, you might be charged $3600 (20%) by a debt settlement company. This might seem like a lot but if it’s able to settle those debts for 40% ($7200), You would still save money.

The net/net

As you have read, DIY debt settlement and using a settlement company each have their advantages and disadvantages. It’s important to weigh them to ensure you reach the decision that will be best for you. It may take some time and mental gymnastics to choose the right one, but it will be well worth the effort in the long run.

Tips for Settling Debts With a Debt Collector

Being contacted by a debt collector can be very scary.

The debt collectors’ only objective is to collect as much money from you as possible, as they’re usually paid on a commission basis. If they can’t collect much money from you they earn less.

The Federal Trade Commission has rules about how debt collectors can act and what they can say. Unfortunately, there are unscrupulous ones that will say anything to get you to pay up.

What Debt Collectors Can’t Do

It’s Important to understand that according to the Fair Debt Collection Practices Act FDCPA), debt collectors cannot:

  • Call you before 8:00 Am or after 9:00 PM
  • Call you on a Sunday
  • Contact you at work if the debt collector knows that your employer does not want you to be contacted there during working hours
  • Get in touch with your employer about a debt you owe, unless the debt is past-due child support.
  • Contact your relatives, friends, or neighbors about the money you owe in order to embarrass you into paying your debts
  • Swear or insult you when you are having a conversation, or threaten you with the loss of your reputation or with jail time
  • Call you repeatedly during a relatively short period of time. Such behavior is harassment, and the FDCPA makes harassment illegal

The first step in dealing with a debt collector

The first, or next time a collector calls, you need to verify the debt. This means requesting what’s called a Debt Verification/Validation Letter. You can ask for this letter either verbally or by mailing/faxing a letter to the collection agency.

Make sure it’s not a “zombie” debt

Your next step is to see if it could be a “zombie” debt. This is a debt that’s many years old and has passed the statute of limitations. The statute of limitations varies from state to state but is typically five years from the time you last took some action on the debt like making a payment. Before you do or say anything, make sure you get your debt verified or validated, so you will know it’s not a “zombie” debt. If you do say or agree to something, you could restart the debt’s statute of limitations, so it would once again be active.

Negotiate to pay as little as possible

The little secret of debt collection is that collectors buy debts for much less than their balances. The collector’s agency could have paid as little as $20 for your $800 debt. A debt collector often will settle for much less than your balance. As in any negotiation, you will want to start low because once you name a number you can’t go any lower. For example, you might start at 30% or less of what you owe. You can also make your offer more appealing by offering to make a lump sum payment.

Ask to have the debt reported as “paid as agreed upon”

It’s very bad to have your debt reported to the credit bureaus as settled or settlement. Ask the collector to report the debt at least as “paid as agreed upon.” While the collector may not agree to this, it’s worth asking – especially if you’re offering to pay the debt in a lump sum.

Reduce the debt by no more than $600

Any amount of debt over $600 that is forgiven will be reported to the IRS and taxed as ordinary income. You can keep this from happening by reducing any debt you settle by no more than $600. Of course, it may be worthwhile to pay taxes on an amount over $600 because that’s debt you don’t have to pay – assuming you can dramatically reduce the amount you owe.

Get everything in writing

If you and the debt collector are able to come to an agreement, make sure you get everything in writing before you pay off the debt. This is so if the collector doesn’t do what the two of you had agreed on, you will be able to prove your case.

Check your credit reports

Finally, wait for a few weeks after you’ve paid the collection agency and then check your credit reports. This is to make sure that everything was reported to the credit bureaus per your agreement. If you find an error, you will need to go back to the debt collector and work to get it corrected.

In summary

Getting contacted by a debt collector can be a frightening experience. But if you understand your rights, as you have read this in article, you can keep the collector from making your life miserable. And if you follow the tips you’ve just read, you should be able to get any debt reduced considerably, paid off and then reported to the credit bureaus in a way that won’t damage your credit history as severely.

How to Negotiate and Settle Your Debts

Is it possible to negotiate and settle a $15,500 line of credit for only $3200! We know of one woman who was able to do just this. But the way she negotiated wasn’t what you might guess as she never used the telephone. She did all her negotiating by letter and fax.

Debts that can and can’t be settled

Did you buy a big home you can’t afford, a luxury car, or a boat or mobile home? The sad news is that these debts cannot be negotiated. If you’re living in a home you can’t really afford, you have only one option – to sell it and downsize.

Debts that can be negotiated include personal lines of credit, credit card debts, department store credit card debts, and old judgments, in other words unsecured debts.

Negotiating your debts

If the stress of dealing with your debts is so severe that it’s actually damaging your health, you need to get busy and start negotiating with your creditors. Despite what you might think it’s best to do it by letter as this gives you an indisputable record of your offers and how lenders’ responses.

You need to first prioritize your debts. The easiest ones to pay off will be the ones with the smallest balances, so put them at the top of your list. Next, call your lenders to get contact information – that is who you should write, her, or his title, their address and phone number and fax number.

Always have a goal

Never begin negotiating with a lender without having a goal. In the case of a credit card debt, there are four things that can be negotiated. You can negotiate to have your interest rate reduced, to have your payments waived for several months, to have your debt converted into a payment plan, or to have your balance reduced.

You may want to have a different goal for different debts. If you owe a lot on a credit card, your goal might be to get your balance reduced by settling the debt. Do you have a personal line of credit that’s choking you? Then, your goal might be to get your interest rate reduced, so you’d have lower monthly payments.

The important thing is to set a goal for each of the debts you’ll be negotiating.

If your goal is to get your interest lowered

If this is the case, you will need to be ready to give the reasons why you need to have your interest rate reduced. This could be that you’re a long time customer, you have a good credit history with them, or that you like doing business with the company and would rather stay with it instead of having to go to a different credit provider. And you must be ready to make your case – whichever is your point – because it won’t necessarily be self-evident to your lender.

If your goal is to settle a debt

If your goal is to settle a debt, the first letter you send to your unsecured lenders should be very blunt. You need to state that you need to settle the deb, andthe amount you’re willing to pay. You should make it clear that lender refuses to settle on your terms, your only option will be to file for bankruptcy. Be sure to end the letter by requesting a response in writing.

Always start low

This first settlement offer should also be almost ridiculously low. For example, if you owe $5800 on a credit card, you might offer to settle the debt for $800. No credit card company will accept an offer this low, but it’s a place to start. What will happen instead is that the lender may counter at, say, $5000. The point here is to start low because once you name a number you can’t go any lower. When a lender responds – either by letter or fax – you can then make a counter offer, and so on until you arrive at an acceptable figure.

Negotiating with lenders is not for the spineless

It’s important to understand that negotiating your debts will take time and more than a small amount of intestinal fortitude. Some people are just not cut out for debt negotiation. You need to be quick on your feet mentally, and have a strong spine. Your lenders won’t just roll over. They will definitely push back. They’ll be tough and you’ll need to be tough, too. If you don’t feel you fit this profile, you might be better off using a debt settlement company such as National Debt Relief to negotiate settlements for you.

What You Absolutely Need to Know About Debt Settlement

If you’re struggling to pay your bills, if you’re several months behind, and just can’t see any way to get caught up, you should definitely consider using a debt settlement company.

A debt settlement company is different from a debt consolidation company. While both types can be helpful, debt settlement is the only way to pay off debts for less than their balances. In comparison, debt consolidation just moves your debts from one set of creditors to a new one.

How it works

If you contract with a debt settlement company, it will approach your creditors and negotiate settlements, where you pay less, in exchange for a lump sum payments.

You will then deposit payments monthly into a trust-like account you set up through the settlement company. You will also pay a fee for the settlement company’s services.

When enough money has accumulated in your account to a level where one of your lenders has agreed to settle a debt, the settlement company will pay it out of your account, which eliminates the debt.

When you should turn to debt settlement

Working with a debt settlement company can be helpful if you already have poor credit and bills you can’t pay. It can also be helpful if you feel you wouldn’t be a very good negotiator or just aren’t a very quick thinker.

Reasons to be cautious

There are downsides to using a debt settlement company. For one thing, there’s the fee. Reputable debt settlement companies generally a percentage of the amount of your debt it’s settling. This usually ranges from 15% to 25%. This reduces the amount of money you save by using a debt settlement company, though you should still save money.

Using a debt settlement company will cause significant damage to your credit history and credit score. However, this will depend on how your debts are reported to the three credit bureaus. If your settlement company can convince your lenders to report the debts as paid in full, this will not damage your credit. If they report them as “settled for less than amount due,” “settlement,” or “settled for less than full amount,” this this will definitely have a bad effect on your credit and credit score.

Peace of mind

One important thing you get with a debt settlement company is peace of mind. You’ll no longer have to deal with angry lenders or pushy debt collectors. The settlement company will be working with them, so they’ll no longer be harassing you. Your life will be simpler, too, because you’ll have only the one payment to make a month in place of the multiple payments you’re currently making. And it should be much easier to remember just that one payment.

Before choosing debt settlement

The government’s Federal Trade Commission page has good information about debt settlement that you should read before choosing it. This will give you a good understanding of the process and what to expect if you do hire a debt settlement company. You might also want to get a free consultation with a consumer credit counseling agency or a bankruptcy lawyer. A consumer credit counselor will review your finances with you and then suggest either a budget or a debt management plan (DMP) to get you out of debt. If you choose a DMP, you’ll then pay the credit counseling agency each month, and it will disperse the money to your lenders. The downside of this is that DMPs generally take five years to complete, plus all your credit card companies will close your accounts. Consider balances comparison that concern is

Beware of the cheats

The Federal Trade Commission passed rules a few years ago designed to weed the cheats out of the debt settlement industry. Unfortunately, some of them have found ways around these rules. Howeveer, it’s fairly easy to spot a company that’s out to scam you. First, it will contact you via email or chat and it will try to get you to pay a big fee upfront. The fact is that reputable debt settlement companies never contact you first and never charge upfront fees. Another red flag is if the settlement company says it will pay your creditors monthly instead of in a lump sum. You should ask how long the company has been in business and if it’s less than five years, you should definitely say goodbye.

What to Expect if You Choose Debt Settlement

Do you feel as if you were choking in debt? This has happened to millions of Americans. In fact, Americans are now carrying an average of more than $16,000 just in credit card debt. The average household that has any kind of debt owes an average of $132,529, including mortgages.

There are a number of ways to manage debt. One that has grown in popularity over the past eight years is debt settlement. This is where you negotiate with one or more creditors to get your balances reduced. The process is also known as debt arbitration, debt negotiation and credit settlement.

The two types of debt settlement

The two types of debt settlement are DIY debt settlement and using a debt settlement company.

In DIY debt settlement, you negotiate directly with your creditors and offer to make lump sum payments for less than your balances to settle your debts. The upside of DIY debt settlement is that it costs nothing. In addition, you may be able to negotiate with your creditors to report your debts to the three credit bureaus as paid in full — even though they were settled.

Unfortunately, there are some serious downsides to DIY debt settlement. For one thing you must have the cash available to pay for the settlements you’re able to negotiate. And second, you must be a good negotiator.

The third big downside to DIY debt settlement is that it can take years, and during that time you’ll continue to be charged interest rates and late fees by those creditors that you haven’t settled with.

What happens when you hire a debt settlement company

The first thing that happens when you hire a debt settlement company like National Debt Relief is that it will contact your lenders and let them know it’s now managing your debts. Most lenders will then stop contacting you, which should be a load off your shoulders. The next thing that will happen is you’ll stop paying your lenders. What you’ll do instead is start transferring a set amount of money each month to an FDIC-insured trust-type account that you manage.

What happens next is nothing. There’ll be an amount of time when nothing is happening while money is accumulating in your account. Once there is enough money in your account to settle one of your debts, the settlement firm will begin negotiating with the lender. This will continue until the settlement company has negotiated settlements with all your lenders. This can take anywhere from 24 to 48 months, depending on how much money you owe and how many lenders are involved.

The biggest upsides of using a debt settlement company

There are several benefits to using a debt settlement company. First, it eliminates the need for you to have the cash available to pay for your settlements. Second, it relieves you of the burden of dealing with your lenders and any debt collectors. Third, and most importantly, it saves you money. Debt settlement companies are for-profits and charge for their services. But even at that, you’ll save money. For example, let’s suppose you owe $18,000 and the settlement company charges a 20% fee. If it’s able to settle that $18,000 debt for $9000, you would still save $5400 and would likely be debt free.

The downsides to using a debt settlement company

The biggest downside to this is what happens during that period of time when “nothing happens.” This could be as many as six months, and those will be months when none of your lenders are getting paid. This will trash your credit history and severely damage your credit score.

The only types of debts that settlement companies can settle are unsecured debts such as personal loans, credit card debts, department store card debts, personal lines of credit, old cell phone bills and medical debts. If most of your debts are secured debts (mortgage, auto loans) or student loan debts, spousal support, back taxes, or family support, there’s nothing a debt settlement company could do to help.

Third, all lenders won’t agree to settle. It’s possible you could end up paying both the debt settlement company and a few of your lenders.

If you think debt settlement is the answer

If this is what you believe, you need to do one of two things. You need to first decide between DIY debt settlement and hiring a debt settlement company. Then, if you decide a debt settlement company would be your best bet, you need to do the math – to determine how much money it would save you. When you push the numbers, you might discover that a debt consolidation loan or consumer credit counseling would be a better option.

3 Signs You May Be Dealing with an Evil Debt Settlement Company

Debt settlement is a very useful tool for paying off a large amount of debt. In fact, over the past eight years it has become the most popular way to deal with out-of-control debt as it’s the only way to get debts paid off for less than their balances.

Unfortunately, some unethical people have set up companies whose only purpose is to take advantage of people that are desperate to get their debts under control and paid off. In many cases these companies just make their customers’ debt problems worse instead of better. As an example of this, the Federal Trade Commission (FTC) recently sued three Dallas-based debt settlement companies, and the Minnesota Department of Commerce has fined the company One Source Management $20,000 as it was charging its customers huge fees without providing any services.

If it contacted you

Unethical debt settlement companies find lists of people that are debt strapped and then contact them looking for work. The good debt settlement companies simply don’t do this. You can find them online but you must contact them first. So, if you receive a call from a debt settlement company it’s probably best to just hang up.

A big upfront fee?

If you’re seriously in debt, there is a lot of money involved. Before you sign up with a debt settlement company there are some signs to watch out for. The bankruptcy lawyer, Theodore W Connelly, has said that there are things that are sure tip-off’s when you first talk to any debt settlement company. The first is that if there should be no upfront fee.

FTC regulators formerly used $75 as their benchmark for an upfront fee believing it’s unreasonable to charge more than $75 to someone who’s already having money troubles. However, it changed the law a few years ago and now the ethical for-profit debt settlement companies just don’t charge anything upfront.

The unfortunate fact is that there are many debt settlement companies that have scammed their customers out of literally thousands of dollars, which has put a black eye on the entire industry.

The initial meeting

If you contact a debt settlement company and your initial meeting with its representative lasts for less than an hour, that’s a definite danger sign. This means the person on the other end of the line isn’t giving you her or his full attention, which is a sign that the company isn’t very serious about your situation.

What’s scary is if your debt situation is so bad you’ve contacted a debt settlement company you’re probably fairly desperate. When this is the, case you may believe anything you’re told. Plus, crooks never act like crooks. The settlement company’s representative might spend as much as an hour going over your finances and pretending he cares about your situation. But if the company seems to be trying to strong-arm you into signing up or telling you that it will make all your money problems vanish – just walk away.

Before you sign anything

Don’t sign anything with a debt settlement company until you’ve gotten on Google to check its credentials. This should give you a good idea as to how many years it’s been in business and not just months. Maybe this is obvious but the more years it’s been in business, the better. Also, be sure to look for negative comments or any complaints that were filed about the company. Even the best debt settlement companies have had some complaints because that’s just the nature of the business. But if you find the company has had multiple complaints this is a very bad sign.

You should try to settle on a couple of companies you think you’d like to work with. Then contact your state’s attorney general’s office to see if there have been any complaints about them.

All of this will take some time but isn’t it better to lose your time rather and not a lot of money?

Check out the alternatives

You might also check out the alternatives to debt settlement before choosing it. For example, if you have a decent credit score you should be able to get a debt consolidation loan and use the money to pay off all of your unsecured debts like credit card debts. You should then have a lower monthly payment than the sum of the payments you’re currently making, plus you’d only have one payment to make a month.

A second alternative is what’s called a consumer credit counseling agency. If you choose one of these services it will work with your lenders to get your interest rates reduced, which will result in a lower monthly payment making it easier for you to manage it.

Are most of your debts credit card debts? In this case, you could do a balance transfer to a new card with a much lower interest rate. Or, if you have really good credit, you might qualify for a 0% interest balance transfer card where you’d have as many as 18 or even 21 months’ interest free. This could be enough time for you to pay off the entire balance on the new card.

Understanding When Debt Settlement’s a Good Idea

Debt settlement has become a very popular way to deal with large amounts of debt. But would you be a good candidate for this option?

One website defines a good candidate for debt settlement is a person that’s looking for quick debt relief, that has a large amount of unsecured debts and doesn’t want to have to file for bankruptcy.

So how do you stack up against these criteria?

What are unsecured debts?

The simplest explanation of unsecured debts is those debts where you were not required to use any kind of an asset as collateral. For example, credit card debts are unsecured debts as are personal loans, personal lines of credit, medical bills and department store credit card bills.

In comparison, mortgages and auto loans are secured debts because they’re secured by your house or your car.

How much unsecured debt do you have?

Some companies say you need to have only $8000 in unsecured debts to be a good candidate for debt settlement. However, this is a case where the more you owe the more debt settlement can help. In fact, the people who get the most benefits from debt settlement generally owe $20,000, $30,000 or even more.

The two types of debt settlement

The two types of debt settlement are DIY debt settlement and using a debt settlement company.

DIY debt settlement is cheaper than hiring debt settlement because these companies charge for their services. If you are able to settle your debts yourself, there’s no cost involved.

How much debt settlement companies charge for their services varies. However, most charge a percentage of the debt they’re settling. This generally ranges from 15% to 25%.

How the two are different

Both DIY debt settlement and using a debt settlement company have the same goal – to settle your debts for less than you owe. However, they use two different approaches. If you choose DIY debt settlement, it’s you that will be contacting your lenders and you’ll need to have enough cash on hand to pay for any settlement you negotiate.
In comparison, if you use a debt settlement company it will contact your lenders for you. And instead of having to make cash payments to your lenders you’ll send money every month to an FDIC-insured, escrow-type of account that you control. You’ll continue to do this until all of your debts have been settled, which typically takes from 24 to 48 months.

The cons of DIY debt settlement

You’ve already read the biggest con of DIY debt settlement which is that thing about needing to have the cash available to pay for any settlements you negotiate. Saving up enough money to pay for just one settlement can take several months and it can take literally years to accumulate enough cash to pay off all your debts through settlements. And all the time you’re saving money to cover your settlements your interest charges will continue to grow and some of your debts may be sold to debt collectors.

Both will damage your credit score

Both these options have their downsides. The first is what debt settlement will do to your credit score, which is damage it severely. The reason for this is that debts that have been settled are reported to the credit bureaus as “settled for less than full amount due” or some similar wording instead of as “paid in full”. This could reduce your credit score by as many as 80 points. Of course, if you’re four or months behind on your bills, your credit has already been seriously damaged.

Second, whether you choose to settle your debts yourself or use a debt settlement company, there can be income tax implications. When a creditor writes off part of your debt settlement, the money may be reported to the IRS as income. This could or couldn’t have an effect on your income taxes depending on other factors such as your earnings and your deductions.

The biggest con of hiring a debt settlement company

You’ve also read the biggest con of this option, which is that debt settlement companies will cost you. However, using one of these firms can still save you money. Here’s an example: Let’s suppose you owe $12,000 and the settlement firm is able to settle these debts at 50% or $6000. Also, supposing it charges a 20% fee or $2400 you would still save $3600., Plus, you’d be free from the frustration and headaches of having to deal with your lenders and maybe with bad-tempered debt collectors.

Which of these options would be best for you is something that only you can decide. But most people choose to use a debt settlement company for the reasons you’ve read – fixed monthly payments and not having to negotiate debts themselves, which can be frustrating and very time-consuming.

Why Debt Settlement Companies Are a Good Idea

When you think of your debt how do you visualize it? Do you see it as a huge swamp you’re slowly sinking into or as a big boulder that’s crushing you. Or maybe you see it as a tidal wave that’s sweeping you away.

Regardless of how you see your debt the one thing you’re probably longing is freedom from it.

You have options

If you truly want to become debt free, the good news is that you have several options. For example, if most of your debt is credit card debt you might be able to transfer your balances to a 0% interest credit card where you’d have anywhere from nine to 21 months’ interest free on both your balance and any new purchases. This could give you enough time to either get your debt paid off entirely or at least cut down to a more manageable size.

The credit counseling option

Consumer credit counseling is a second option. Find a good non-profit credit counseling agency and you’ll be assigned a counselor who will review your finances and then suggest either a budget designed to help you become debt free or what’s called a debt management plan (DMP). If the counselor recommends one of these plans you’ll stop paying your creditors and make a monthly payment to the credit counseling agency instead, which will then distribute the money to your lenders. This can be a very good way to consolidate debts and get them paid off. However, a DMP generally takes from four to five years to complete and all your credit card accounts will be closed.

The debt settlement option

A third way to deal with an overwhelming pile of debt is through a process called debt negotiation or debt settlement.

One form of this is called DIY debt negotiation. This is where you contact each of your lenders and negotiate a settlement by offering to make a payment for less than your balance. As an example of this, if you owed $3800 on a credit card you could contact the bank that issued the card and offer to make an immediate payment of, say, $1900 to settle the debt. Of course, you will need to have the $1900 available to immediately send the lender. And you would need to be experiencing some kind of financial emergency otherwise no lender will agree to negotiate with you.

However, very few people try DIY debt negotiation. Instead, they choose to use a debt settlement company.

Why this is a good idea

The cheapest way to handle debt negotiation is to do it yourself. The reason for this is because debt settlement companies charge for their services. Most have a fee ranging from 15% to 25% depending on the total amount of the debt it’s negotiating for you.

However, there are reasons why using a debt settlement company is still a good idea.

For one thing, it will save you money despite its fee. Let’s suppose you owed $11,000 on a credit card and the debt settlement company charges a 20% fee – or $2200. This might seem like a lot but if it were able to settle that debt for $5500 (50% of the debt), you’d still save $3300.

With a debt settlement company, you’d have a fixed monthly payment for a fixed amount of time instead of needing to have the cash for those lump sum settlements. And your monthly payment should be for considerably less than the sum of the payments you’re currently struggling to make.

How it works with a debt settlement company

Your fixed monthly payment won’t actually be a payment. It will be a transfer of money from your checking account to an escrow-like account you manage.

When there is enough money in your account to settle one of your debts, the settlement company will ask you to release the funds from your account to pay it off. This process will continue until the company has settled all your debts. This typically takes from two to four years.

Living stress-free

Another big benefit of using a debt settlement company is that this will relieve you of the stress of having to deal with angry creditors and those nasty-tempered debt collectors. Once you sign a contract with a reputable debt settlement company you’ll be able to sit back knowing your debts are being managed by a team of professionals. Plus, you’ll know exactly when you’ll be debt free.

A Few Words of warning

Using a debt settlement company can be a real godsend but it does come with its downsides. For one thing debt settlement will damage your credit score. This is because your debts will not be reported to the credit bureaus as “paid in full”. Of course, if you’re so far behind on your bills you’ve decided to use a debt settlement company then debt settlement may not have that much of an effect on your credit score – because it’s already been pretty well trashed.

Second, not all of your lenders may agree to debt settlement. So, you could end up both making payments to the debt settlement company and to some of your lenders.

But even considering all these things if you’re being crushed by your debt and don’t know which way to turn then turning to a debt settlement company would definitely be a good idea.

The 5 Biggest Don’ts of Debt Settlement

If you’re not familiar with debt settlement, it’s a way to get debts paid off without having to take out a loan. It’s grown considerably in popularity since the Great Recession of 2007, which left so many people underwater on their mortgages.

The simplest explanation of debt settlement is that it’s where you offer a creditor a lump sum payment for less than you owe to settle the debt.

This can be an especially helpful option if the majority of your debt is unsecured debts, which are those where you were not required to provide an asset to collateralize them such as credit card debts, medical bills, personal lines of credit, department store cards and utility bills.

If you’ve reached the point where you think debt settlement would be a better option than consumer credit counseling or a debt consolidation loan, there are five big don’ts you need to be aware of.

Don’t overlook the negative effects

Make no mistake about the fact that debt settlement will damage your credit score. This is because any debts that have been settled will not be reported to the three credit bureaus as “paid in full”. They will be marked as “paid for less than amount due,” “settled for less than full amount” or some similar wording. In addition to damaging your credit score debts that have been settled will serve as a warning to prospective lenders that you failed to live up to your promises. This will make it much more difficult for you to borrow money at reasonable interest rates going forward. And finally, any amount of money that was forgiven in debt settlement could effect your income taxes.

Don’t wait

If you fail to pay a debt for six months what generally happens is that the account will be charged off. While this doesn’t mean you’re no longer responsible for the debt it will have a very negative effect on your credit. In fact, the lender may package your debt with a bunch of other debts and sell them to a debt buyer or debt collection agency. This is something you definitely don’t want to happen as debt collectors can make your life incredibly unpleasant. So, be proactive. If you’re going to contact your lenders to negotiate settlements do it before they write off your debts.

Don’t be unprepared

Very few, if any, lenders will agree to settle with you unless you can prove you’re having a financial hardship that prevents you from paying your entire balance. Your hardship could be anything from a divorce to unemployment. But whatever your hardship is you need to be prepared to prove it, along with documentation of your income, assets and all of your other existing debts. This is because debt settlement means lenders are giving you a concession and they’re just not willing to give concessions to people who are just trying to get a deal.

Don’t make promises you can’t keep

If you promise to immediately send a lender a sum of money to settle a debt make sure that you follow up on this promise. If a lender agrees to let you pay for the settlement over some period of time, make sure you can afford the payments you’ve agreed to. If you promise too much and find you can’t continue making the payments and are forced to default, your debt will be immediately referred to a debt collection agency. And, again, this is something you just don’t want to have happen.

Don’t fail to check your credit reports

You will need to check your credit reports a few weeks after you’ve settled a debt to make sure it was reported properly to the three credit bureaus. While the law requires lenders to report settled debts some fail to do this. When this happens your credit, reports will show those accounts as being indefinitely delinquent. There have been cases where people checked their credit reports only to find that the debts they had settled are showing as their full balances still owed. If you check your credit reports and find that one or more of the debts, you had settled are still showing as unpaid you must contact the appropriate lender(s) and ask it to correct the error.

Do check your credit reports regularly

An important do is do check your credit reports on a regular basis. A report released a few years ago by the Federal Trade Commission revealed that nearly 20% of us have errors in our credit reports that are damaging our credit scores. You can get your individual credit reports free from the three credit bureaus – Experian, Equifax and TransUnion – or all three on the website www.annualcreditreport.com. Review them carefully and if you do find an error make sure you dispute it with the appropriate credit bureau. While all three have forms on their websites for this purpose experts say it’s much better to dispute the error in writing making sure you enclose whatever documentation you have that proves the error.

8 Semi-truths and Downright Lies About Debt Settlement

Have you seen or heard ads touting the benefits of debt settlement?

If you’re on the verge of defaulting on your credit card bills and fighting to just stay ahead of debt collectors, then the idea of debt settlement can sound like a miracle cure. But before you rush to sign up with a debt settlement company it’s important to know that there are some semi-truths and downright lies about this form of debt management.

1. I have to pay a company to settle my debts for me

This one falls somewhere in the gray area between being a lie and a semi truth. The fact is you can settle debts yourself but there are reasons why most people choose not to.

The fact is that DIY debt settlement requires the ability to make lump sum payments to lenders. Most people struggling with debt simply don’t have the cash available to make those payments so they choose to use a debt settlement company where they would then have an affordable monthly payment.

2. You can get your credit card balance cut in half for any reason

This one is definitely a lie. The credit card companies will negotiate and it’s possible to get a balance cut in half but only if you’re having some kind of financial hardship. If you’ve gone through a nasty divorce, been hit with a huge medical bill, lost your job or are suffering some other financial emergency it’s likely you will be able to get those credit card balances cut in half. But no credit card issuer will agree to cut your balance substantially “for any reason”.

3. Debt settlement won’t affect my credit score

The French term for this is au contraire. We would say “no way”.

The truth is that debt settlement will affect your credit score and not in a good way. No one knows precisely how much debt settlement will damage your credit score but there are experts who believe it will reduce it by 80 points or more. However, if you’re in so much trouble with your credit card bills that you’re contemplating debt settlement it’s likely that your credit score is already in the dumper so that debt settlement may not have that big an effect.

4. If I use a debt settlement company I will lose control of my money

The good news is that this one is also a lie. The truth – assuming you choose an honest and reputable debt settlement company – is that you will be required to deposit a set amount of money each month in an escrow-like account that you manage. When there is enough money in that account to settle a debt the settlement company will call and ask that you release enough money from your account to cover the settlement.

5. I will have to pay the settlement company a lot of money upfront

Fortunately, this is also a lie unless you’re dealing with an unscrupulous debt settlement company. Our Federal Trade Commission has made this practice illegal but there are still some companies that will try run this scam.

Don’t fall for it. Reputable companies such as National Debt Relief add a percentage of their fee to each of your monthly payments but don’t actually collect the money until they have settled all of your debts. This amounts to a 100% satisfaction guarantee because if you were to change your mind and drop out of your program it wouldn’t cost you a cent.

6. Debts that I don’t settle will stay in my credit report forever

I guess you could call this one a semi-truth because unsettled debts will stay in your credit reports for seven years – but certainly not forever. This is because there’s a seven-year statute of limitations for collecting debts. In other words, if you have a debt that you incurred in 2007 and never settled then it became uncollectible sometime in 2014. But word of caution – if you make even a small payment on that debt before the seven years has elapsed, this will “reset the clock” and your debt will become collectible again for seven years from the date you made that payment.

7. My only two options are debt settlement and bankruptcy

If you can’t pay your bills these are not your only options. For example, you could contact a credit counseling agency where you’d be given a debt management plan (DMP) that would, in effect, consolidate your debts. Another option would be a debt consolidation loan. Or if you still have a halfway decent credit score you might be able to transfer the balances on all your credit cards to one with a lower interest rate so that you’d have a more manageable monthly payment.

8. Debt settlement will get rid of all my debts

Unfortunately, there are some debts that can’t be settled. For example, mortgages, auto loans and other types of secured loans generally cannot be settled. In addition, there are some unsecured debts that can’t be settled including alimony, family support, spousal support, student loan debts and unpaid taxes.