Would You be a Good Candidate for Debt Settlement?

There’s a good reason why many people have chosen debt settlement. It’s the only way to pay off debts for less than the amounts owed. In fact, in some cases, people have been able to settle their debts for 40% or 50% of their balances. This would reduce a $2000 credit card debt to less than $1000, making it much easier to repay.

Don’t think this sounds too good to be true because it is true. It’s possible to settle some debts for much less than their balances. But there are some things you need to know about debt settlement before you leap in, and here are five of the most important.

The type of your debts

To be a good candidate for debt settlement most of your debt must be what’s called unsecured debts. Typical of these are credit card debts, past rent, a personal line of credit, department store credit cards, civil court judgments, and collection agency accounts. Federal student loan debts are unsecured debts but cannot be settled thanks to federal law. Private federal student loans can usually be settled. If most of your debt is federal student loan debt, a mortgage, an automobile, boat, or RV loan, you would not be a good candidate for debt settlement. These are secured loans and if you were to default, your lender would simply repossess that car, boat, or house.

How much you owe

You must owe at least $10,000 to be a good candidate for debt settlement, and this is another of those cases where more is better. The reason for this is one of simple mathematics. Debt settlement companies generally charge a percentage of the amount of debt being settled. Let’s say you owe $8000 on credit cards. You might be charged the minimum – 15% – or $1600. If the settlement company were able to settle that $8000 debt at 50% or $4000, you would only save $2800. At that rate, you might be better choosing another form of debt consolidation.

How patient you are

It’s important to understand that if you owe a lot of money, it will take a lot of time to settle your debts. This is true whether you hire a debt settlement company or choose DIY debt settlement. Why is this the case? It’s due to the nature of the beast. Companies will settle only if you can promise to make an immediate lump sum payment. For the sake of an example let’s suppose you owed $6000 on one credit card, $6200 on another, $7400 on a third, and $5000 on a personal line of credit. If you chose DIY debt settlement you would need to save up $2500 or so to settle that $5000 line of credit. Then, you would have to begin saving around $3000 to pay off that first debt.

With a debt settlement company, you would transfer a set amount each month to an FDIC-insured account that you manage. But, once again, you’d need to have $2500 in your account before the debt settlement company could make a settlement offer.

As you can see, debt settlement takes a certain amount of patience because it could take literally years to get all your debts settled. And, in the meantime, some of your creditors may continue to harass you.

You must owe money to the right kind of companies

We’ve never heard of a credit card issuer that won’t settle. But there are some companies that just won’t. If you choose a reputable debt settlement firm, you will be told – before you sign up – if you owe money to any companies that refuse to settle. You’ll then need to do the math to determine if professional debt settlement would save you enough money to justify its cost.

You need to understand its effect on your credit

Make no mistake about this. Debt settlement will hurt your credit. No one knows for certain how it will affect your credit score, but it’s thought it will drop it by at least 80 points. Debts that are settled will stay in your credit files for seven years. Prospective lenders will be less likely to loan you money when they see that you settled debts instead of paying them off in full. You may have a more difficult time getting credit in the future and it will cost you more – in the form of higher interest rates.

In conclusion

Debt settlement has proven to be the best way out of debt for many people. But before you choose this option, you need to consider what you have read in this article. Do the math and make sure it would be your best choice both in terms of money and your credit.

Would Debt Settlement be Your Best Path to Debt Relief?

How much would you save through debt settlement? Unfortunately, this question can’t be answered with any certainty. You might be able to settle a debt for 50% of its balance, 60%, 40% of its balance, or some other number.

How long does debt settlement take? This is another question that can’t be answered unequivocally. If you hire a debt settlement company, you could be debt-free in 24 or 48 months. This will depend primarily on how much you owe. Settling debts yourself could take 48 months or longer again depending on how much you owe, but in this case, also on how good a negotiator you are.

What does debt settlement cost?

This is yet another question that’s tough to answer. DIY debt settlement is basically free because you’re doing all the work. Professional debt settlement companies are for-profits and charge for their services. Their fee could be as much as 25% of the amount of debt that’s forgiven. For example, if the settlement company gets $15,000 of your credit card debt forgiven, the fee might be around $3750.

Debt settlement also has a hidden fee. If lenders report your settlements to the credit bureaus, it will have a very negative effect on your credit score. This could cause your score to drop by as many as 80 points. Plus, those settlements will stay on your credit reports for seven years. When prospective lenders see that you have settled your debts, instead of paying them off, they may be less likely to give you more credit.

The first decision

The first decision you’ll need to make is to settle your debts yourself or hire a debt settlement company. DIY debt settlement can save you the most money but you’ll need to be an experienced negotiator and have the cash available for the lump sum payments you’ll be required to make.

Hiring a debt settlement company will save you less money but eliminates the need to have the cash available for those lump sum payments and relieves you of the negotiating process.

Understanding what types of debts can be settled

It’s important to understand the types of debts that can’t be settled. At the top of this list are secured debts like home mortgages and auto loans. Federal student loan debts, spousal support, alimony, child support, back taxes, secured lines of credit, and payday loans also can’t be settled.

Would you be a good candidate for debt settlement?

Just because you have a lot of debt doesn’t mean you’d be a good candidate for debt settlement. Most of your debt needs to be unsecured debts like credit card debts. You must be unable to make even your minimum monthly payments because of a financial emergency. This could be that you lost your job, had a serious illness, or maybe a divorce left you holding the bag for all your debts.

Some companies won’t negotiate

Lenders aren’t legally obligated to negotiate your outstanding credit card or loan balances. However, most credit card companies will negotiate if you can prove you’re having a financial emergency. This comes under the department of half a loaf is better than none. Credit card issuers understand they can often recover more money through debt settlements than other collection methods such as selling your debt to a debt collection agency.

Choosing a debt settlement company

If you decide to use a debt settlement company, it’s important to choose a good one. For example, reputable debt settlement companies operate transparently. An honest one will disclose all its fees and costs upfront before you sign a contract. Its contract will be easy to understand. It will give you an estimate how long it will take to settle all of your debts, and approximately how much money it can save you.

No honest debt settlement company will ask for any money upfront. In fact, if you’re asked to pay a fee upfront, run – do not walk away – as this is the sure sign of a swindler.

A legitimate debt settlement company will have you transfer your monthly payments to a third-party where the money will be held in escrow. And it will send all of its resolution offers to you for your approval before making any payments to your lenders.

Consider the alternatives

Last but not least, be sure to consider the alternatives before choosing debt settlement. It’s possible that you might be better off doing debt consolidation through a debt consolidation loan or consumer credit counseling. The advantage of these options is that they would not damage your credit as will debt settlement. The downside is that neither can do anything to reduce your debt.

In conclusion

f you believe you’re a good candidate for debt settlement and can live with its downsides, it could very well be your best path to debt relief.

Why Debt Negotiation May Not Help You With Student Loan Debts

Few things in life are more exciting than graduating from college. You get to toss your cap in the air, walk across a stage, get cheered, and someone hands you a diploma. You’ve survived four years of all-nighters, tough courses, and boring instructors. It’s a time that definitely calls for a celebration.

But then, three months later, things don’t seem so rosy. You’ll need to start paying back those student loans, and that can be a real burden. If you’re typical, you graduated owing $20,000, $30,000 or more. You’ll have 10 years to pay back the money and that means 10 long years of big monthly payments.

When debt negotiation can help

If you have private student loans or loans from a bank or an online lender, you may be able to negotiate them. But it won’t be easy. Your lender’s number one objective is to collect every dollar you owe. The first thing it may do is offer you a sort of timeout where you would not be required to make your payments for a period of time. Or, it may agree to temporarily reduce your payments. Unfortunately, all these things do is just sort of drop kicks your problem into the future.

If you want to settle the debt, you’ll have to make an airtight case. This means you’ll need to prove you’ve shrunk your budget as much as possible, and have eliminated all discretionary spending. You may have to provide the lender with your bank and credit card statements to verify your situation.

It will be a tough sell, but if you stick to your guns you may be able to negotiate a good settlement.

When debt negotiation can’t help

Federal student loans can’t be settled. It’s that simple. They can’t even be discharged in bankruptcy. Several ways exist to get them discharged or forgiven but never settled.

The good news is that options are available that could make repaying that money much less painful. When you graduated, you were automatically put on the standard or 10-year payment plan. This means your monthly payment will be 1/120th of your total debt, plus interest. But you don’t have to stay on that plan. Several other programs tie your payments directly to your discretionary income.

PAYE and REPAYE

The two most liberal of the federal payback programs are PAYE and RRPAYE.

PAYE or Pay As You Earn is for Direct Subsidized and Subsidized Loans, and Direct Plus Loans. It caps your maximum monthly payments at 10% of your discretionary income. Your payments would be recalculated each year based on your updated family size and Income. However, to be eligible for this program, you must be a new borrower on or after October 1, 2007. Plus, you must have received a disbursement from a Direct Loan on or after October 1, 2011.

REPAYE or Revised Pay As You Earn offers the same benefits as PAYE, with the payments capped at 10% of your discretionary income. The difference between it and PAYE is that anyone who got a direct loan is eligible for this plan.

Both of these programs would mean lower monthly payments at least initially. Before you sign up for either of them, think seriously about your future income. If you’ve chosen a career such as teaching or social work where your income will remain relatively stable, then one of these programs could make good sense. But if you’ve chosen one where you believe your income will increase substantially over the years, you might be better off choosing another option.

A third option

There is a third option that’s been gaining in popularity – a debt consolidation loan. It can be used to pay off both private loans and federal student loans. One of these loans could make sense if you have high-interest loans. The interest rate on this type of loans is at an almost all-time low. Getting one with a lower interest rate would mean lower monthly payments. You could also negotiate the term so you’d have the loan paid off either faster or slower – depending on your financial circumstances.

In summary

Don’t get discouraged about your student loan payments. As you have read, options exist that could make it much easier to repay the money. Get more information about the ones discussed here. It’s certain you’ll be able to find one that will make repaying those loans a lot easier and much less painful.

The 7 Most Frequently Asked Questions About Debt Settlement

We don’t have to be mind readers to guess you’re having a problem with debt. The fact you’re reading this article Is a definite clue. Of course, we have no way of knowing the size of your problem. You could be just a month or two behind on your bills, or you could be drowning in debt and looking for a life preserver. If you fall in the former category – if you’re just a few months behind on your bills – there are probably better solutions to your problem than debt settlement. For example, if your problem is credit card debts, your best solution might be to do a balance transfer to one of those cards that offer 0% interest for 12 or 18 months. Or your best answer might be a debt consolidation loan.

If you fall in the latter category and feel as if you’re drowning in debt then your best choice could be debt settlement.

1. What is debt settlement?

According to Wikipedia, “Debt settlement, also known as debt arbitration, debt negotiation or credit settlement, is an approach to debt reduction where the debtor and creditor agree on a reduced balance that will be regarded as payment in full.”

2. Why would a lender ever agree to settle a debt?

Lenders are never eager to settle debts, as their first choice is always to collect all you owe. Secured lenders, or those where you used an asset to get the loan (think mortgage), will rarely, if ever, negotiate. Credit card companies and banks will usually negotiate because these are unsecured loans. They have only two options if you default. They can either sue you or sell your debt to a collection agency. They’ll negotiate settlements if you can convince them that you’re in such bad shape financially, there’s just no way you’ll ever be able to pay off the full amount of the debt.

Another reason lenders will agree to negotiate is if you can offer to make a lump sum payment to settle the debt. Experienced customer service people at the credit card companies and banks do understand that getting half a loaf now is better than getting nothing or getting very little over a long time.

3. What does debt settlement cost?

If you choose DIY debt settlement your only cost will be your time. As you might guess, debt settlement companies are for-profit organizations. The best ones charge fees based on the amount of debt being settled. This typically ranges from 15% to 25%. The good ones don’t actually collect their fees until they have settled all of your debts. This is essentially a 100% satisfaction guarantee as if you became dissatisfied with your program for any reason, you could drop out, without it costing you a cent.

4. How long does debt settlement take?

If you negotiate your settlements, it could take a long time as you will need to save up enough money to pay off a debt, then save again to pay off a second debt, and so on. If you choose a debt settlement company, it will likely take from 24 to 48 months – depending on how much you owe.

5. Will debt settlement affect my credit score?

Unfortunately, it will have a bad effect on your credit score whether you choose DIY debt settlement or a debt settlement company. This is because you’re basically paying back less than you promised. Debt settlement will also make it more difficult for you to get credit in the future when lenders see that you had settled your debts, instead of paying them off in full.

6. How can I know a “good” debt settlement company from a scam?

Good debt settlement companies never contact you. In fact, if you’re contacted by a debt settlement company, you can just about bet it’s a scam. Reputable debt settlement companies never charge any fees upfront. And they will be very open about their fees, and how long It will take for them to settle your debts. Their contracts will be easy-to-read, and you’ll be able to easily contact them anytime you have questions or concerns. Good debt settlement companies have at least A ratings with the Better Business Bureau and are usually members of the American Fair Credit Council (AFCC)

7. Which is better, debt settlement or bankruptcy?

Debt settlement is the better option unless you’re so deep in debt that not even it could save you. The thing about bankruptcy is that it leaves a stain in your credit reports that will be there for 10 years. Bankruptcy will have a more serious impact on your credit score than debt settlement, and may even cause your insurance premiums to increase. You might be able to get new credit a few months after debt settlement but it will take years after a bankruptcy. Worst of all, the bankruptcy will stay in your personal file for the rest of your life. You could get turned down for a really good job 12 years from now when the prospective employer sees you’ve had a bankruptcy.

In summary

Debt settlement can be a very good option, but whether it’s the right one for you will depend on several factors such as how much you owe and your overall financial situation. You need to think carefully before choosing debt settlement because it’s nothing to be taken lightly. And be sure to check out the other options before choosing debt settlement.

How to be More Mindful When Working on Debt Settlement

Being mindful, or practicing mindfulness, is one of this year’s hottest topics – just behind our new president.

However, there seems to be a number of different definitions for mindfulness. One of the best is that of Leah Weiss, who teaches Leading with Mindfulness and Compassion at Stanford University’s Graduate School of Business. She says it can be viewed as “the intentional use of attention.”

Mindfulness, according to Weiss, has been used to treat anxiety, chronic pain, depression, and even OCD. But in this case, it’s important use is in debt settlement. This is because if you want to save as much money as possible for debt settlement, being mindful means making choices that will help you achieve your goals.

Build awareness

Carrie Schwab-Pomerantz says the best place to start is with what she calls a “financial cleansing.” This is where you focus on determining where your money goes. To do this, you will need to use money to cover all your everyday expenses for 30 days. You’ll undoubtedly find it harder and more painful to do this, instead of just pulling out the plastic. This should help you build mindfulness of your spending.

A second thing you need to do is delay purchases. No matter how badly you might want to buy that 50-inch HDTV, wait a few days, or even better, a week. You might then find it easier to resist the temptation. Or you might at least decide to put it off until you have the cash to pay for it.

Another way to be mindful is to make sure you purchase that HDTV from a company where you know it has a liberal return policy. Then, if you decide you made a mistake, you can fix it.

Finally, make a resolution to stay away from jewelry, electronics, and clothing stores where you might be tempted to make an impulse purchase.

Learn to pay attention

If you just pay attention to things, this can help you stop before buying something. You might try meditating for as little as five to ten minutes a day, which will mean focused breathing. This will actually affect those areas of your mind that control motion, attention, and habit. If you’re truly committed to the idea of eliminating money-wasting or mindless choices, this will build that area of your brain that helps you be more mindful.

Determine what you want

Another financial planner plasters the wall next to her refrigerator with photos that represent her goals. If your goal is a wonderful, one-week cruise, you might put snapshots of the boat and your destinations in your kitchen where you see them every day. This becomes a daily reminder of what brings you joy.

If you make your goals specific, you’re more likely to act on them. Be conscious of your spending. Try to imagine what your finances will look like 12 months from now. What changes could you make that you’d feel good about? For example, you could decide to turn a spending habit into a once-a-year treat, and then put the money you saved towards settling a debt.

Make your spending meaningful

Start tracking your spending to figure out what you value, and what you’re likely to regret. Write down what you buy then, 24 hours later, note how you now feel about it. Do the same thing three days and a week later. Did that purchase give you the satisfaction you had imagined? Are you really enjoying TV more because you now have an HDTV with a bigger screen? You should be able to see patterns emerge after a bit that will help you make better choices in the future — to save even more money for debt settlement.

Don’t get discouraged

It may take time for you to see real progress towards your goal of debt settlement. Remember that it takes a supertanker one day to turn just one degree. It takes 24 hours before it actually alters course. Don’t get discouraged if you don’t see immediate progress. Hang in there, and you’ll soon have enough money saved to begin settling your debts. It just takes time and mindfulness.

DIY Debt Settlement vs. Using a Debt Settlement Company

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

The two options

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

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

DIY debt settlement

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

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

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

You will be your only client

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

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

The advantages of a debt settlement company

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

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

One set payment

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

You won’t have to worry about anything

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

It will cost you

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

The net/net

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

What to Expect if You Choose Debt Settlement

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

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

The two types of debt settlement

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

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

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

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

What happens when you hire a debt settlement company

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

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

The biggest upsides of using a debt settlement company

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

The downsides to using a debt settlement company

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

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

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

If you think debt settlement is the answer

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

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.

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.