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.

How to Settle Your Debts Like a Pro

Do you owe a lot of money? And by this we mean $20,000, $30,000 or even more?

If this is the case, you probably feel as if you were drowning in debt. You might have considered using a debt settlement company such as National Debt Relief but you’re thinking you might be able to settle your debts yourself.

DIY debt settlement is not for the faint of heart

Choosing DIY debt settlement means you must be persistent, do hard work and deal with debt collectors for months or even years.

You need to first ask yourself if debt settlement is for you. To answer this question means reviewing your entire financial picture as well as alternatives such as a family loan or bankruptcy. This is because debt settlement is likely to damage your credit and especially your credit score.

This is because your creditors and any collection agencies involved will report your late payments, collections and settlements not as “paid in full” but as “settled for less than full amount owed”. And this will remain in your credit file for seven years.

The upside of debt settlement

Of course, the biggest upside of debt settlement is that you will save money as you’ll be paying less than your balances. In addition, when you do it yourself you save what you would have to pay a debt settlement company.

Your creditors might take it easier on you when they know you’re doing this on your own rather than having to deal with a debt settlement company that might be much more aggressive. Plus, debt settlement companies generally put their customers on a three- or four-year plan so that creditors would not see their money for a very long time.

Finally, trying to settle your own debts could help you get your financial house in order. You’re forced to deal with your debts on your own and face up to them, which should teach you lessons that would help you keep from getting into big debt again.

Settling your debts like a professional

The approach you take to DIY debt settlement can make a big difference as to whether you’re successful or not.

The first step is to create a timeline. The goal here is to get settlements as quickly as possible to cut the risk of getting sued. This means you will need to come up with the money to make settlement payments equivalent to 30% or 40% of your debts before you begin contacting your lenders. In addition, you should figure that within the first six months of your delinquencies your balances will increase about 10% due to penalties and interest.

Step two is to understand your typical collection cycles. For example, with a credit card the bank’s policy could be to change off debts when they’re 180 days past due. If this happens, your account will probably be sent to the bank’s recovery department and you could begin settlement negotiations at this point.

You will need to find money. Aside from saving money to pay for your settlements you will need to find additional ways to come up with cash as this will increase your odds of success. If you have a motorcycle just sitting in your garage that’s not 100% necessary or a valuable collection of coins, baseball cards or antiques you should consider selling them to raise money for your settlements.

Don’t be emotional. Think of debt settlement as a business. You may be feeling shame, guilt or fear about the debts you haven’t been able to manage. Your lenders will take advantage of this. To them it’s no more than a numbers game. Don’t get upset, angry or start yelling if you’re not getting the deal you had hoped for. Stay calm and in control.

Step five is to set up a call management system. Did you know the average number of accounts the average consumer has that’s settling their debts? The answer is six. If you multiply this by multiple calls a day, it can get crazy especially if you’re being harassed by collection agencies. Here’s where you could use technology to your advantage. For example, you might assign a silent ring tone on your cell phone to collectors. Or you could have those calls sent to a second phone. Then, when you have time, you could listen to all your messages and return the calls on your own time.

You will need to have a financial hardship. No lender or debt collector will agree to settle with you unless you had something serious happen such as a divorce, unemployment or someone in your family was hit with a big medical bill. In other words, you need to be able to convince your creditors that you’re seriously underwater. The experts say you should be ready to provide documentation proving your hardship just in case you’re asked for it.

Finally, get everything in writing. If you get to a settlement agreement with a debt collector or the original creditor over the telephone get everything in writing before you pay a single cent. If you don’t do this, that payment you thought was settling your entire debt could be reported as just a part payment. This can be especially true when dealing with debt collectors as they will say just about anything to get you to pay.

Busted –The Myths of Debt Management Work

Have you’ve seen TV commercials or read ads from debt management companies such as Consumer Credit Counseling Service or Consumer Credit.com that promise to save you thousands of dollars?

That’s the myth they want you to believe.

The truth is that yes; they can get your debts reduced but only by getting your credit trashed.

They’ve sprung up like dandelions in the spring

Debt management companies have sprung up mostly as a result of the Great Recession of 2007. Their promise is that they will help “manage” your debts by requiring you to make one payment a month to them, which they then divvy up among your creditors. In addition, they are often able to negotiate lower interest rates and lower payments to your creditors.

A form of debt consolidation

If you contract with a debt management company to take over your debts, it’s not a loan as would be the case if you were to borrow the money to pay off your debts. However, it is a form of debt consolidation. People sometimes get the two of these confused.

The biggest difference is that with a debt consolidation loan you’re required only to pay interest on the money you borrow. In comparison, debt management firms charge fees that can be as high as 25% of the amount of debt being managed.

It comes at a price

It is true that a good debt management company should be able to get your interest rates and maybe even your monthly payments reduced but it comes at a price. If you use a debt management company and then apply for a conventional, VA or FHA loan, you will be treated about the same as if you had a chapter 13 bankruptcy.

And if you apply for a traditional mortgage the guidelines for underwriting the loan will consider that your credit is trashed.

The truth – hard work is in

The truth of debt management is that what’s required is that you must change your behavior. This is only where you can get real debt help. Changing your financial behavior will change your life for good! The fact is that true debt management is just about one thing – and that’s you controlling your money.

No magic formula

There’s no mystical, magical formula for good debt management. The solution is a combination of common sense and having a plan for your money. Good debt management is hard work because it’s 80% your behavior and just 20% your knowledge. While some debt management companies might want you to think of it as rocket science, it’s not.

But it’s not easy. The truth is that it’s really pretty hard a lot of the time.

However, it’s worth it. If you create a plan and are determined to get your debts under control you’ll save money because you won’t be paying any debt management company a fee, your credit reports will stay clean and you’ll have more flexibility.

A real debt management plan

There are just five steps to a real debt management plan.

The first is to make a budget because without a budget there is no way you can know how much money you have to put against your debts. There are a number of free apps available for creating a budget and there are free budget worksheets available online you could download.

Step two is organizing your debts. This means making a list of all of your debts, with the names of your lenders, your balances, your payment due dates, their interest rates and minimum payments required. Again, you could just enter this information into a worksheet.

Calling your creditors is step three. When you call, ask for its hardship department. Explain to your contact exactly why you’re having a serious financial problem. This could be due to a job loss, a nasty divorce, a huge medical bill or because you were forced to take a serious cut in pay. In most cases, you’ll find that lenders will be willing to reduce your interest rates rather than having to deal with a default.

Your next step is to make a repayment plan. The two most popular debt repayment plans are called the snowball method and the avalanche method. Choosing the snowball method means ordering your debts from the one with the lowest balance down to the one with the highest and then concentrating your efforts on paying off that first debt. The avalanche method is where you order your debts from the one with the highest interest rate down to the one with the lowest and then focusing all your efforts on paying off that first debt. Regardless of which you choose you will need to continue making the minimum payments on your other debts.

Step five may be the hardest because it’s to begin using credit wisely. This may be the most difficult part because it’s the changing your behavior thing. If you have credit cards that are still open, you might use one of them to make several small purchases and then run home and immediately pay off your balance. You should also set up automatic payments for a small recurring bill to make sure it’s paid in full every month.

But the most important thing of all is to stay well away from any spending that would tempt you to get into more debt. You need to learn to use credit sensibly and not as “retail therapy”.

7 Reasons Why You Need to Start Budget Tracking Immediately

You’ve probably been told at least a zillion times that you need a budget and there are good reasons for this. Without a budget, it’s just flat impossible to know where your money is going and how much you have left over for debt settlement. We admit that budget tracking is not easy. It means noting everything you spend money on right down to that candy bar you bought out of your company’s vending machine – and you must do it almost immediately before you forget about it. If you’ve ever tried tracking your spending, you probably remember those days when you got home with $14 less in your wallet than you thought you had but had no idea as to where the money had gone. That’s because you weren’t budget tracking. If you’re not doing this, here are seven reasons to begin doing it immediately.

Budget tracking builds organization and discipline

If you are budgeting this can definitely help you remain disciplined to organize your finances, which is step number one in learning your overall financial health. The fact is that if you don’t have data that’s easy to read in the form of budget tracking there’s just no way you can know what’s going on in your financial life, let alone do anything about changing it.

It makes you think about your money

An important side benefit of having a budget and tracking your spending is that the more time you spend thinking about your money the more you’ll be focused on building your wealth. And when you start thinking about your money more often that’s when you’ll start finding ways to save more money or to increase your income.

It helps you prevent a crisis

If you’re tracking your spending and reviewing your finances regularly this will help you spot trends and discover areas that can be improved long before they become problems. When you prevent a crisis from starting, you’ll be way ahead of everyone else who will only be able to react.

Budgeting is a quantifiable way to measure your progress

We guess in theory that everyone would like to cut their spending but it’s impossible to do this unless you track your progress. Budget tracking can certainly be used to measure your progress but it’s not just a benefit, it’s really a requirement.

Budget tracking can be a great tool for starting family discussions

It’s always tough talking about money. But if you have a wife or husband that’s involved in making a budget and tracking expenses it’s always a good idea to lay out the facts when talking about money. Using an expense tracker is a really good tool to help with this. And if you have children that would be affected by your decisions you might want to involve them in some of your expense tracking.

It is power

You may have heard the old saying that “knowledge is power”. It’s definitely true when it comes to keeping track of your budget. If you do this. you’ll know precisely how much money you need on a monthly basis. When you know this, you will be able to plan and create an emergency fund that will have a sufficient amount of cash. Plus, you will be able to calculate how you will treat unexpected issues such as losing your job or having a child and how that will affect your finances.

It will relieve you of much stress

A tremendous amount of stress will be lifted off of your shoulders when you know your exact financial situation. You’ll no longer have to worry about those unknown expenses of life. Even in a worst-case scenario, if you find your finances are on the shaky side, you’ll be spending your time fixing them and instead of hours worrying about them to the point where it makes you crazy.

Budget tracking is not all that difficult

The best part of this is that budgeting and budget tracking is not half so difficult as it used to be. This is thanks to all the budgeting apps now available either free or very low cost. Some of the most popular of these include Mint, You Need A Budget, Every Dollar, Easy Envelope Tracker, Billguard and Dollar Bird. Probably the most popular of these is Mint as it will not only track your spending but automatically divide it into budget categories. Once you set spending limits in each of your categories, Mint will actually notify you via email if you overspend in any of them. The important thing is to review the top-rated apps in this category, evaluate them carefully and then choose the one that you think will best fit your needs. And, oh, if you forget a candy bar or latte somewhere along the way, don’t panic. This won’t change your life and will have very little of an effect on your finances.

“69% of Americans Have Less Than $1000 in Savings”

Do you find this statistic hard to believe? Does it make you want to run off to Snopes.com to check if its valid or just truthy? We can save you the trip. This comes from an article in Money magazine, which also reported that this is a big increase since last year. What’s even scarier is that this 69% of Americans don’t have enough money saved to cover a $1200 emergency.

So how do you stand? If you’re considering debt settlement, do you have more than $1000 in savings or are you part of that 69%? If you fall into that latter category you need to get to work and build up your savings. This is because debt settlement can save you money – and probably a lot of money – but it has one drawback. You must have the money saved to cover the lump sum payments you’ll be required to make to settle your debts.

How much do you need to have saved?

This will depend, of course on how much money you owe. For example, if you owed $30,000 to four different lenders you might be able to settle these debts for around $15,000. But that begs the question, how would you ever get that $15,000?

How do you get there?

There’s the old riddle which begins with the question, how do you eat an elephant? The answer, of course, is one bite at a time. And that’s how you get the $15,000 or whatever to settle your debts – one deposit at a time.

Here’s the math.

If you could save 10% of your net income a month or $500 with a 1% return you’d have $5005 saved at the end of year one, which should be enough to settle one or more of your debts. Keep saving at this rate and you should be able to save enough in two or 2 1/2 years to cover all of your settlements.

If 10% is too much

You might be sitting there thinking, wow! If only I could save 10% of my net income given my current financial situation. If this is the case, you may have to start smaller. If you can start by saving just $50 a month you will eventually reach your goal – it will just take you longer. But the important thing is to start saving money until it becomes an ingrained habit. In fact, you might want to have the money automatically withdrawn from your checking account and deposited into your savings account so that you’d be saving every month without even having to think about it.

If you don’t have a budget

It’s just flat impossible to save money for debt settlement unless you have a budget. The reason for this is simple. If you’re not budgeting your money you could easily end up spending every cent you earn or even more. Does the B word as in budget cause cold shivers to run up and down your spine? Budgeting has become almost drop-dead simple thanks to the many apps available. Some of the most popular of these are You Need A Budget, Mint.com, Wally and Billguard. Mint.com will track your spending, divide it into categories and send you alerts at least once a week so you can easily see exactly where you stand. Once you’ve created your budget categories Mint will even email you an alert if you overspend in any of them. Plus, it gives you a nice graph of your spending so that you can see exactly where your money has gone.

The 20/50/30 budget

There is also a minimalist way to budget called the 20/50/30 budget. It’s so simple you could probably write it on the back of an envelope. The 20 is the 20% you save (at least theoretically), the 50% is to cover all of your necessities and the 30% is your disposable income or the money you can spend howsoever you choose. Of course, you will need to track your spending for at least 30 days before you can divvy it up into the 20%, 50% and 30%. You can also probably track your spending on the back of an envelope but make sure you write down everything right down to that $.75 bag of pretzels you bought from a vending machine.

No matter which you choose

No budget is any better than the person that created it. This is a short form way of saying that regardless of which budgeting option you chose the critical thing is to stick with it. This will take more than a small amount of self-discipline at first but if you can stick with your budget for five or six months it will become such an ingrained habit you’ll hardly even think about it. And remember the words of Nelson Mandela, “It always seems impossible until it’s done”.

How to Improve Your Credit Score After Debt Settlement

The harsh fact of debt settlement is that it does have its consequences. First and foremost, it will cause your credit score to take a hit – maybe by as many as 80 points. This could be enough to drop you from having good credit to just fair credit.

Check your credit score and credit reports

Once your debts are settled you’ll need to check your credit score to see where you stand. You should also order your credit reports from the three credit bureaus – Experian, TransUnion and Equifax. There are two reasons to do this. First, you need to make sure your settlements were reported to the credit bureaus.

Second, it’s important to check your reports for errors that may be dragging down your credit score. A study released in 2012 by the Federal Trade Commission reported that 20% of us have errors on at least one of our credit reports. What you need to look for is whether your personal information is accurate and if all your credit accounts have been reported. Also, look for any late or missed payments that you thought you had made on time and any accounts or credit applications that you simply don’t recognize.

If you find any, it is incredibly important to dispute them with the appropriate credit bureau – by letter – and with any documentation you have to prove your case.

Determine why you have a low credit score

Of course, debt settlement may be the major reason why you have a low credit score but there could be others. For example, your identity could have been stolen and the thief is abusing your credit. There could be a collection account from many years ago that’s still being reported to the credit bureaus despite the fact that it’s passed the statute of limitations in your state. Or maybe you defaulted on one of your loans and it’s now appearing as multiple defaults because that debt has been sold and resold several times to debt collectors. Finally, it’s possible that your credit history was mixed up with that of someone else with a similar name.

It’s also important to know how your credit score is calculated. It has five components. The most significant of these is your credit history (35% of your score) which is basically how well you’ve handled credit in the past. The second most significant component is your credit utilization ratio, which is the amount of credit you have available divided into the amount you’ve used. It accounts for 30% of your score. If you do the math and find you have a credit utilization ratio of 40% or higher you can improve it by either paying down some of your debt or getting more credit. Between these two options the better by far is to pay down some of your debt. If you can do either of these and get your ratio down to 35% or better, it will definitely have a positive effect on your credit score.

Finally, there is the age of your accounts, which accounts for 15% of your score, and your account mix and history of credit applications – each of which accounts for 10% of your score.

A low credit score will cost you a lot of money

A low credit score is expensive. In fact, it can cost you literally thousands of dollars over the course of your lifetime in the form of increased interest rates. A low credit score can cause higher insurance premiums as well as higher utility and security deposits. Plus, there’s the stress of having to deal with upset creditors or even debt collectors, which can actually lead to health problems.

Make a plan to fix things

If you find all of your information is accurate and you know what you did wrong, you need to create an action plan to fix things. There are sites such as Credit.com where you could create a free account to make an action plan.

Unfortunately, creating an action plan may not be enough to improve your credit score. For example, if you were the victim of identity theft you may have a very hard time proving that you’re not the one that applied for that car loan or, worse yet, defaulted on it.

It may not agree with you

As noted above, if you find errors in your credit reports you will need to dispute them with the three credit reporting bureaus. The three credit bureaus have 30 days to process any dispute you file with them. But just because you’ve filed a dispute doesn’t mean the credit bureau will necessarily agree with you and remove the error. What that happens then you’ll just be stuck with bad credit.

Answering the Question — Debt Settlement or a Debt Consolidation Loan?

Short of moving to Bolivia, India or Sweden there’s not much you can do about your debts except pay them. The other alternative – not paying them – would lead to serious consequences that could haunt you for years. For example, this would mean you’d have a very low credit score, which would make it tough for you to get new credit at anything approaching a decent interest rate. A low credit score could cause your insurance premiums to go up and you might find it very difficult to rent a house or apartment.

The pros and cons of a debt consolidation loan

The biggest pro of a debt consolidation loan is that it should have a much lower interest rate than the average of the credit card interest rates you’re currently paying. Personal loans are now available with interest rates as low as 5.95%. If you could qualify for one of these loans would definitely save you money versus the interest rates you’re now paying. Consolidating multiple credit card debts into a debt consolidation loan would also mean just one payment a month and you could even automate it so that you’d never again have to worry about missing a payment. In addition, debt consolidation loans have fixed terms of either three or five years so that you would absolutely know when you’ll be debt free.

The biggest con of a debt consolidation loan is that if you have lousy credit you may not be able to get one. And if you could get one it would certainly have a much higher interest rate than 5.95%. Plus, you might be required to pay a significant origination fee and most personal loans have pre-payment penalties.

The pros and cons of debt settlement

If you’re not familiar with debt settlement this is where you offer lump sum payments to your lenders to pay off your debts but for less than their balances. As an example of this, you might be able to settle a $5000 debt for $3000 or even $2500. In fact, debt settlement is the only way to pay off debts for less than you owe.

While it is possible to do DIY debt settlement most people choose to hire a debt settlement company. There are several good reasons for this. First, because most people are not skilled negotiators it would be tough for them to negotiate really good settlements. Second, and maybe most important, using a debt settlement company eliminates the need to have the cash available to pay for the settlements. Getting back to our example of settling a $5000 debt for $3000 you’d need to have the $3000 in cash to immediately send the lender because if not, it would not agree to any settlement. If you hire a debt settlement company you’d also have consolidated your credit card debt as you’d be required to transfer a set amount of money each month to an escrow-like account – instead of having to worry about making those lump sum cash payments.

The biggest con of debt settlement is what it would do to your credit score. Debts that have been settled are never reported to the three credit bureaus as “paid in full”. While no one knows for sure how much this will damage your credit score there are experts in this kind of thing that say it would lower it by at least 80 points. Of course, if you’re so far behind on your bills that you’re thinking about debt settlement the odds are pretty good that your credit score has already taken a serious hit.

A second con is what it costs to use a debt settlement company. Most of them charge a flat fee of 15% to 25% based on the size of your debt. So settling $25,000 of your debts could cost you as much as $6250.

The third pro of using a debt settlement company is that it would relieve you of the worries and stress of dealing with your creditors. The settlement company would take all of this off your hands by dealing with your creditors for you.

So which is best?

While this is a question that only you can answer – depending on your financial circumstances – debt settlement is often the better option because of the money it would save you. Let’s go back to that $25,000 of debts where your fee could be the maximum of 25% or $6250. For the sake of the example we’ll suppose that the debt settlement company could settle those debts for $12,500. Subtract the $6250 from this and you’d still be saving $6250. Plus, you would be debt-free in anywhere from 24 to 48 months. In comparison, if you were able to get a debt consolidation loan at, say, 8% with a three-year term you’d have a monthly payment of $783.41 and the cost of the loan will actually be $28,202.73 or more than $3200 just in interest charges.