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.