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.