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.