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.