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.

What You Don’t Know About Debt Settlement Could Put You In A World of Hurt

If the total amount of debt you owe on your credit cards looks like it could be the national debt the odds are you’re feeling stressed out and overwhelmed. You’re wondering how you’re ever going to be able to get out from under that debt load. Then you happen upon a company’s webpage that promises to reduce your unsecured debts by 50% or better by settling them for pennies on the dollar. Sounds pretty great, huh? Well, there are some things about debt settlement you need to understand before you sign up with any of these companies – to keep from ending up in a world of hurt.

Understanding debt settlement companies

Companies that offer to settle your debts are for-profit organizations. This means the first thing that you need to understand is that there will be a fee involved. What these companies do is contact your creditors and negotiate for you to pay a “settlement” to resolve the debt. First, understand that settlement is just another word for a lump sum payment that’s less than the full amount that you owe. Reputable debt settlement companies will have you set aside a specific amount of money every month. They will instruct you to transfer that money into an escrow account every month so there will eventually be enough money in it to pay off the settlements that the company negotiates.

There are risks

The second thing to understand about debt settlement is that there are risks involved. For one thing, the debt settlement company will probably require you to continue depositing money in your escrow account for as many as 48 before all of your debts are settled. Many people – and you may be one of them – have a problem making their payments long enough to get all or even part of their debts settled. As a result, they drop out of their programs. Reputable debt settlement companies such as National Debt Relief offer a 100% satisfaction guarantee. If, in a worst-case scenario, you found you had to drop out of your program there would be no cost and you would have all of the money in your escrow account returned to you. Of course, none of your debts would have been settled so you would likely be further behind than before you signed up for your debt settlement program. The bottom line here is that before you sign up with any debt settlement company review your finances carefully to make sure that you will be able to set aside the required amount of money monthly for the full length of the program.

Not all of your creditors may agree to settle

While the majority of your creditors will agree to debt settlements this is not true of all of them. Creditors are under no obligation to settle with you. It’s possible that you could end up paying the debt settlement company monthly and several of your creditors as well. That would certainly put you in a world of hurt.

Your credit score will take a hit

Debt settlement companies that are less than ethical may tell you to stop making payments to your creditors, which will cause your credit score to take a serious hit. Your debts could continue to accumulate penalties and late fees that would put you even further in the hole. You could also continue to be harassed by your creditors or debt collectors requesting payment and some cases even be sued. On the other hand if you’ve already missed numerous payments on debts, your credit score has probably already been trashed so this might not make much of a difference.

It could be a scam

The FTC (Federal Trade Commission) has cracked down on fraudulent debt settlement firms but that doesn’t mean there aren’t still some lurking out there waiting to scam you. For example, they might “guarantee” they will settle all of your debts for 30% to 60% of what you owe. Or they might try to collect their fees before they settle any of your debts. And some totally fail to explain the risks that come with their programs such as the damage that will be done to your credit score.

You can just about bet that the debt settlement company is a fraud if it charges any fees at all before it settles your debts or if it guarantees it can make all of your unsecured debts disappear. Fraudulent debt settlement companies often tout some “new government program” that will bail you out of your credit card debt. They may tell you to stop talking to your creditors but fail to tell you what the consequences of this will be. Another sign that the company is probably a fraud is if it tells you it will stop all lawsuits and calls from debt collectors. Finally, it may say it can guarantee that it will get your unsecured debts paid off for pennies on the dollar – which is a big red light.

To avoid ending up in a world of hurt

Before you sign an agreement with any debt settlement company do your homework. This is going to be a big decision that will cost you a lot of money. Check out the company with the Better Business Bureau and even your state’s attorney general. Make sure that it’s licensed to do business in your state. Go on to Google or some other search engine and type in the company’s name plus the word “complaints.” This will tell you in a hurry whether or not the company can be trusted. Also look for online reviews to see what other people have said about the company you’re considering. And be sure to look for lawsuits filed by state or federal regulation agencies accusing the company of engaging in unfair or deceptive practices as this might just be the biggest red light of all.