Which is a Better Way to Debt Relief — Debt Settlement or Debt Consolidation?

Looking for debt relief? Two popular ways exist to achieve it – debt consolidation and debt settlement. If you’ve been considering your options you may be wondering which of these is best. There is no easy answer to this because each has its pros and cons.

The two forms of debt consolidation

Debt consolidation can be achieved several different ways. One is to get a debt consolidation loan. If you have a good credit of 661 or above, you could do this with a personal loan. However, if you owe more than $10,000, a home equity loan or homeowner equity line of credit might be your only option.

A second way to consolidate debts is by going to a consumer counseling agency where you would be given a debt management plan (DMP). This will consolidate your unsecured debts because you would then make just one payment a month – to the consumer credit counseling agency.

The pros and cons of debt consolidation

The biggest upside of debt consolidation is that it can be done very quickly. A debt consolidation loan can usually be obtained in just a few weeks. Getting your debts consolidated with a debt management plan shouldn’t take much longer.

If you choose a debt consolidation loan, you should have a much lower payment than the total of the payments you’re currently making on your unsecured debts. This is because you would have a lower interest rate and more time to repay the loan. You would also know exactly when you will be debt-free.

Going to a consumer credit counseling agency should also mean a lower monthly payment than the total of your current payments. This is because your counselor will work with your lenders to get your interest rates reduced and any fees waived.

The biggest negative of both these options is that neither can do anything to reduce your debt. If you owed $20,000 on credit cards before debt consolidation, you would still owe $20,000. If you choose a debt consolidation loan, all you do is move your debt from one set of lenders to a new one. With consumer credit counseling you would still owe the same amount of money to the same lenders but would have better terms.

The pros and cons of debt settlement

The biggest upside of debt settlement is that It’s the only way to get debts reduced. For example, you might be able to settle a $5000 credit card debt for $2500 or less. The way this is done is by offering a one-time, lump sum payment to settle the debt.

DIY debt settlement has one big downside. You must have the cash available to make those lump-sum payments. If you’re typical, it could take you two, three, or even more years to accumulate enough money for those payments. Plus, you would have to be a very good negotiator.

These negatives are why most people choose to hire a debt settlement company. This eliminates both the need to save money for your lump sum payments, and to be a skilled negotiator.

Using a debt settlement company also means debt consolidation.This is because you would transfer a set amount of money each month to an escrow account instead, of paying your lenders.

The biggest downside to using a debt settlement company is the cost. Most charge a percentage of the amount of debt being settled. This typically ranges from 15% to 25%. However, if you owe more than $10,000, you should still save money using a debt settlement company.

When you use a debt settlement company, it generally takes from 24 to 48 months to become debt free. Another important con is what debt settlement will do to your credit. Many experts believe it will drop your credit by at least 80 points. It will also leave a stain on your credit reports for seven years. Lenders will be less likely to grant you credit in the future as they will see you settled your debts instead of repaying them in full.

In conclusion

Debt settlement is s better option than debt consolidation for most people because of its ability to get debt reduced. However, the important thing is to weigh each option’s pros and cons carefully so that you choose the one that makes the most sense given your financial circumstances.

How to Know if Debt Settlement is Right For You

Do you feel like you’re drowning in debt but are unwilling to file for bankruptcy? One good option would be debt settlement. It wouldn’t be as good as just repaying your debts, but it can give you a good, second chance.

If you’re unfamiliar with debt settlement, it’s where you negotiate with your creditors to get them to agree to let you pay less than you owe by offering a lump sum payment. While it’s possible to negotiate settlements yourself, most people choose to use a debt settlement company. The major reason for this is that it eliminates the need to have the cash available to make any lump sum payments. Instead, you would make monthly payments to the settlement company until enough cash has accumulated in your account to settle your debts.

What else you need to know about debt settlement

Debt settlement definitely has some downsides. For one thing, it will have a negative impact on your credit. Any time a lender agrees to settle a debt, a notation will be made in your credit files that the debt was settled for less than you owed. This will stay on your credit reports for seven years. In addition, your credit files will contain all those missed and late payments you had before your settlements so that your credit score will basically hit rock bottom.

Would it be right for you?

Before choosing debt settlement there are some questions you must ask yourself. The first question is this a last ditch effort? In other words, debt settlement is for people who are so far in debt they see no way out. Debt settlement should be your last alternative instead of something you choose because you think it’ll save you a few dollars. In other words, to be a good candidate for debt settlement you must be at the point where you truly can’t make any payments on your debts no matter how frugal you try to be.

Second, you must be way behind on your bills. A company will never agree to a settlement if it thinks that it can eventually get the full amount you owe. It can be really frustrating because, if you’re still able to make at least some payments, you probably won’t be granted your request for a settlement. Many creditors won’t settle a debt until it’s close to a default.

Can you take what it will do to your credit? Debt settlement we’ll have a very negative effect on your credit reports and your credit score. Think about the totality of your financial situation, and what debt settlement would do to it. Of course, your credit may already be shot if you’re carrying big balances and are way behind on your payments. While your credit score will plummet as a result of debt settlement, at least you would be debt-free again and can begin to rebuild.

Fourth, can you trust the debt settlement company? You’re in a situation where you’re desperate and vulnerable, and some less-than-legitimate companies will try to take advantage of this. In fact, you need to practice extreme caution before employing any debt settlement company.

Red flags to watch out for

The first big red flag is if the debt settlement company contacts you. Reputable settlement companies just don’t do this. Second, are you asked to pay any upfront fees? The FTC made upfront fees illegal in 2010. But there are still companies that will try to get you to pay them.

The second red flag is if the company seems anxious to take your case right away. A reputable debt settlement company won’t take just anyone. It will evaluate your situation to make sure you would be a good candidate for debt settlement. It may even help you develop a budget so that you’ll have the maximum amount of money available for your settlements.

Is the company licensed or located in the state you live in? Has it been in business for only a few months? Does its website fail to include an address? Are there multiple names on its paperwork? All these are things that can tell you something just isn’t right, or maybe your gut tells you something’s wrong. In either event, you should run the other way.

In conclusion

Don’t choose debt settlement unless you can answer “yes” to the first four questions posed in this article. Beyond this, it’s important to understand that debt settlement can be a long, complex process. If you don’t have the patience, temperament, and organizational skills to deal with this process, you’d be better off hiring a debt settlement company.

Try this Revolutionary New Method to Pay Off Serious Credit Card debt

If someone asked you to picture your debt, what would you see? Would you picture it as a prison cell, an incredibly steep mountain, or maybe a huge pit?

Regardless of how much debt you have, or how you picture it, one thing is certain. You’re desperate to get rid of it.

So, What could you do?

The two proven methods

Until recently, only two proven ways to pay off debts existed. They were the snowball method and the avalanche method.

The way the avalanche method works is that you make a list of your debts in order from the one with the highest interest rate down to the one with the lowest. You then put all your efforts towards paying off the debt with the highest interest rate. This is because that will save you the most money. Once you have it paid off, you move on to the debt with the next highest interest rate, and so on.

The other way, the snowball method, is where you list your debts from the one with the lowest balance down to the one with the highest. Then, instead of focusing on the debt with the highest interest rate, you put all of your energy towards paying off the debt with the lowest balance. The psychology behind this method is that it should be relatively easy to pay off that first debt, which will give you motivation (as well as extra money) to begin paying off the debt with the second lowest balance and on and on.

The problem with both these methods

Unfortunately, both of these methods share a common problem. They rely on you budgeting money every month to make the minimum payments on all your other debts while throwing extra money at the debt you prioritized

This can be very taxing financially as both require you to come up with large payments every month.

Introducing the snowflake method

An alternative to both the snowball and avalanche methods was recently developed – the snowflake method.

The way it works is that instead of having to worry about coming up with those big payments every month, you just find ways to shave some money off your everyday spending. You then use this money to make small, frequent payments on your credit card debt. You may feel those small amounts are microscopic when compared to your overall debt balances. But over time, those little payments will save you hundreds of dollars and knock months off your repayment term.

Of equal importance, you can use the snowflake method in combination with any other repayment options.

Apply those everyday savings to your debt immediately

At the heart of the snowflake method is applying those everyday savings to your credit card debt immediately. As an example of this, let’s suppose your weekly budget for groceries is $50. However, thanks to coupons you only spend $46 this week. With the debt snowflake approach, you’d take the surplus or the $4, and immediately make a payment on your credit card account. Then, do this every time you save some money. Instead, of spending $60 for a haircut, go to Great Clips for $25. Then, put that extra $35 towards your debt the minute you get home.

Does this really work?

If you visualize your debt as that very steep mountain, the idea of paying an extra $4 or $5 here and there might seem kind of ludicrous. But, believe it or not, those little snowflake payments can end up having a big impact.

Here’s an example. Let’s suppose you have a credit card with a balance of $3000 that has an APR of 15%. Assuming your minimum monthly payment is $100, it would take you 38 months to pay off the debt and would cost you $784 in interest.

If you could save four dollars a week by clipping coupons and apply that extra $16 a month to your credit card debt, you would be able to pay it off in just 32 months, and you’d pages $647 in interest. As you can see, applying those snowflakes, or small savings, each month would get that debt paid off a full six months earlier.

In summary

If you’re trying to pay off a mountain of credit card debt, it can be unrealistic to try to find large sums of money to repay your balances. This is why the debt snowflake method can be effective. If you’re diligent about applying those little daily savings to your credit card debt, you’ll both pay off your balances sooner and save a lot of money to boot,

Should You Use Your Equity to Pay for Debt Settlement?

If you’re unfamiliar with debt settlement, it’s where you contact a lender, and offer to make a cash payment to settle the debt but for less than you owe. Suppose, for example, you owed $8000 on a credit card. You could contact the bank and offer to make a lump sum payment of, say, $4000 to settle the debt. If the bank accepts your offer, it will treat the debt as if it had been paid in full – at least so far as you’re concerned. Unfortunately, it won’t report it to the credit bureaus this way. It will report your debt as “settled,” “settlement,” “settled for less than full amount due,” or some similar wording.

The downside

While debt settlement has become a popular way to achieve debt relief, It does have one big downside. You must have the cash available to pay for any settlements you’re able to negotiate. Getting back to our example of settling a $8000 debt for $4000, you’d need to have the $4000 ready to send the lender in the form of a wire transfer or certified cashiers check. Needless to say, if you’re struggling with debt it’s unlikely you’ll have enough cash available to pay for that settlement.

Do you have equity in your home?

If you have equity in your home, you could use it to pay for your debt settlements. There are three ways to cash out equity. The first is to refinance the mortgage. Today’s mortgage rates are at nearly all-time lows, though they are expected to gradually rise over the next year. For example, Consumer Direct is currently offering 30-year fixed-rate mortgage loans with an APR as low as 3.875%. The online mortgage provider, GSF, has 30-year fixed-rate loans with an APR of 3.77%. And American Financing is offering 30-year fixed-rate refi loans with an APR of 4.250%.

If you don’t want to refinance your mortgage, you could get either a home equity loan or homeowner equity line of credit. FlagStar Bank now has a home equity loan with an introductory rate of 4.49% with a loan to value of 80% required. It’s also possible to get a home equity line of credit (HELOC) with an APR of 3.99% from PNC Bank or 4.0% from Alliant Credit Union.

Note: To be eligible for the interest rates quoted here, requires a credit score of 740 or better.

Do the math

Now, compare these interest rates with the interest rates on your debts. If most of your debt is credit card debt, you’re probably paying anywhere from 14% to 21%. Plus$4000, you’d’s compound interest. If you’re making just the minimum payments on your credit card debts, you’re actually paying interest on interest. As an example of this, if you owed a total of $10,000 on your credit cards at 17%, and made just the minimum payment each month of $242, It would take you five years and three months to pay off the $10,000. And it would cost you $15,147 in interest.

In comparison, a home equity loan for $10,000 with an interest rate of 7.5% would require a monthly payment of just $100 for 48 months. And it would cost you only $2,750.23 in interest. So, if you were to take out a home equity loan and use the $10,000 to pay off your credit card debts, you’d realize potential savings of nearly $13,000.

If you don’t own your home

Of course, if you don’t own your home, you lack equity. In this case, you might be able to get a debt consolidation loan and use the money in debt settlement. If you have at least a “good” credit score (above 700 points), you could get an unsecured loan with a term of five years at an 11.21% interest rate, which would mean a monthly payment of just $218.

Hire a debt settlement company

If you can’t get a personal loan, another good option is to hire a debt settlement company. There are two advantages to this. First, it eliminates the need to have the cash available to pay for your settlements. Second, it lets you avoid having to haggle with your lenders yourself. Of course, debt settlement companies do charge for their services. The best ones charge a percentage of the amount of debt being settled, which usually ranges from 15% to 25%. However, the reputable ones, like National Debt Relief, don’t actually collect their fees until they have settled all of your debts. This means if you were to become unhappy with your program at any time, for any reason, you could simply drop out, and it wouldn’t have cost you a cent.

In conclusion

If you owe $10,000 or more and have a sufficient amount of equity in your home, you should think seriously about cashing it out and using the money in debt settlement. This will save you money versus trying to pay off the debt yourself. Plus, if you use a debt settlement company, you could be debt free in as few as 24 to 48 months.

Debt: How Can Something That Feels So Normal Be So Bad?

Ask any 10 people if they have debt, and the odds are overwhelming that at least eight will answer “yes.” Debt has just become a fact of life for most all Americans. According to the website StatisticBrain.com Americans with credit cards are now carrying an average balance of $15,675. American household debt now averages $132,158.

More than 40 million Americans have student loan debt. The average monthly student loan payments for borrowers age 20 to 30 is $351! And the delinquency rate on student loans is 11.2% – meaning that more than one in 10 borrowers default on their student loans.

According to a study commissioned by Bankrate.com and reported on Yahoo.com, only 51% of those with credit card debt worry about it. This same survey revealed that only 25% worried about their credit card debt, and only 28% felt guilty about how much money they were putting on their credit cards.

The disconnect

What these statistics reveal is that there’s a substantial disconnect between the amount of debt Americans are carrying, and their feelings about it. It suggests that Americans may be carrying a considerable amount of debt – especially credit card debt – but they don’t worry about it.

Some do struggle

Df course, some people do struggle with their debts. A recent article in the Durango Herald reported that people earning less than $30,000 a year feel they will never be debt free. It has also been reported that millennials are worried about their student loan debts. And older people who are taking out student loans to help pay for a child or grandchild’s education may also feel they won’t get that debt paid off in their lifetimes.

It may feel normal but it’s bad

These statistics suggest that debt has become an accepted fact of life for most Americans. The problem is that most of them apparently don’t understand that debt is bad.

You’re penalizing your future self

The first bad thing about debt is that you’re penalizing your future self because the money you borrow today will have to be repaid by the future you. This will leave less money available for you to enjoy a good life. While many people don’t think of it this way, debt is like writing an IOU that you’ll have to honor sometime in the future.

Debt costs money

Unless you have a rich uncle who agrees to loan you money interest-free, all the other money you borrow will cost you in the form of interest. Credit cards can be especially costly due to compounding interest. Let’s say you borrow $5000 at 14%. The next month you’ll owe $5014 and will be paying interest on it. It gets even worse if you make just the minimum payments on that debt. Here’s an example of how bad this can be. If you make a minimum monthly payment of $200, it will take you 30 months to pay off the $5000 and cost you $946.20 in interest charges.

Debt can cause physical problems

Believe it or not, the stress of dealing with debt can lead to physical problems. A study done by AP-AOL found that people who say they have high levels of debt stress suffer from a myriad of illnesses related to it. This can include migraines, back pain, ulcers, depression, anxiety, and heart attacks.

Debt can damage your credit score

Like it or not, your financial life is pretty much governed by that little three-digit number called your credit score. It’s comprised of five components. The most important of these at 35% is your credit history or how you’ve handled credit in the past. If you were late in making payments, or worse yet, missed a few payments, you’ll likely have either a fair or poor credit score. This will make it more difficult for you to get new credit, and it will have a higher interest rate. In fact, a poor credit score good keep you from renting a house or apartment.

Debt can hurt your marriage

Debt can cause arguments as to how much debt is too much, who’s responsible for the debt, and who’s creating the debt. These arguments can put a serious amount of stress on a marriage. They can even escalate to the point where the marriage completely breaks down.

In conclusion

Don’t let yourself get lulled into the feeling that debt must be okay because it’s so normal. As you have read, debt can have very serious consequences, up to and including a heart attack. Stop thinking that debt is normal and start thinking what you can do to get rid of it. Your future self will thank you.

Spring is Here! Time to Clean Up Your Finances

We don’t know what’s going on where you live but where we are, we’re seeing signs of spring everywhere. Our roses are greening up, as is our grass. We’ve seen small leaves on a neighbor’s bushes, and another neighbor is having his lawn aerated.

Spring is a time when most people’s thoughts turn to cleaning out the garage, emptying those overstuffed closets and organizing pantries. But another type of spring cleaning that should be on your list is spring cleaning your finances.

What’s your goal?

Whether your goal is a comfortable retirement or financial independence, it’s important to get organized, and have an action plan in place to help you achieve it. Both these are difficult to do if you’ve gotten lost in paper trails or trying to cope with four file drawers of old documents. The good news is that you can simplify your finances just by following these seven simple tips.

Try out a mobile app

Dozens of mobile apps are available that make it easy to track your spending and keep your personal finances organized. Three of the most popular of these are Mint, PocketGuard, and Level. Each will help you in different ways like budgeting, bill paying, monitoring your credit score, or paying off debts. Take a look at these, choose one, and give it a try. You may be surprised at how much it will do to simplify your financial life.

Freshen up your budget

The best way by far to manage your finances is with a realistic balanced budget. Just about everyone’s situation changes over the course of six months or a year, and yours is probably no exception. If it’s been some time since you last revisited your budget, review it to see if there might be areas where you could cut down on your spending. If so, you’d then have more money for your emergency fund or retirement savings. Be sure to also review your categories as there may be ones you could drop or new ones you should add.

Create a process for bill payment

You should have as many of your bills as possible on auto pay. If you haven’t yet done this, now would be a good time to do it. You can probably auto-pay most of your bills through your bank. There may be some companies that won’t accept automatic payments from your bank. If this is the case, you will need to contact them to see if you could set up auto-pay with them. If you can’t do either of these, you should set up a calendar to track bills and their due dates. You might have a program on your mobile phone called Reminders, which you could use to send an alert when bills are due.

Make a debt payoff plan

Your debts are not going to repay themselves, and procrastination is never the answer. When you review your budget, try to find money for paying off your credit cards and student loans. If you can’t make a debt repayment plan yourself, consider going to a nonprofit credit counseling agency. You should be able to find one in your area through the National Foundation for Credit Counseling. Many credit unions, universities, housing authorities, and branches of the US Cooperative Extension Service offer counseling programs. Choose one of these, and you’ll be assigned a counselor who will help you develop an action plan. These organizations also offer helpful, free resources.

Check your insurance policies

Talk with your insurance agent to see if there might be ways to qualify for reduced premiums on your life, auto home insurance. We recently checked with one insurance company and found that, yes, it could reduce our auto insurance by that advertised 15%. You might also save money by increasing your deductibles or changing your coverages. Whatever money you save on your insurance is more money for the rest of your budget.

Review your financial documents and shred the old ones

We were checking out some of our documents the other day and found we were still keeping records from a home we had sold 10 years ago. If you’re typical, you probably also have a lot of old tax returns and documents that you no longer need. Go through everything, shred your older documents and then make a system to organize your papers. Do this and you’ll be able to easily access documents when you need them.

Stop clutter before it happens

You probably think that there’s no way to avoid all those loan and credit card solicitations. But there is. You can opt out of most of them by calling the national credit bureau’s phone number 1-888-5-OPTOUT (67-8688). Do this and you’ll stop clutter before it happens.

In summary

While your spring cleaning those closets, your garage and basement, find some time to spring clean your finances. Get them organized and freshened up, and you’ll be able to look forward to better and easier to manage personal finances.

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.

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.