Although credit card debt settlement is often confused with credit card debt consolidation, it is in fact its own unique method for handling debt. While consolidation is simply combining all debt into one lump sum to be paid and doesn’t actually reduce the overall principle owed, settlement is, at its core, a form negotiation that many times actually reduces the total debt a person owes.
At first glance, many people view debt settlement as a miracle cure for the seemingly insurmountable pit they find themselves in with credit card companies. However, like everything that seems too good to be true, debt settlement has some substantial drawbacks that ultimately deter many debtors from using it. Yet, for people at the end of their rope with constant collection calls, debt settlement can truly be a lifesaver. A legitimate debt settlement plan can, in many situations, be an extremely viable and beneficial alternative to declaring bankruptcy. In this article, I will cover all the basic aspects of debt settlement, all the possible drawbacks it can create, and what steps a person needs to take in order to qualify for a structured settlement.
Drawbacks of Settlement
Getting a debt settlement on your credit card may create some negative effects that need to be discussed. In order to properly understand the reasons why, the average debtor must first understand that, in the vast majority of cases, credit card companies do not want to settle debt if the previous payments have been made more or less on time. This is because, if a person is making the absolute bare minimum payments, credit card companies can end up collecting well over three times the initial principle due over time. With interest rates being what they are, people who are just struggling to get by via paying off just the monthly accrued interest and a small portion of the principle end up eventually shelling out astronomically higher amounts in the end when compared to what the initially owed. For this reason, major credit card companies are usually more than happy to continue collecting your money monthly for as long as you continue to pay them, which makes attempted negotiation pretty difficult if not outright impossible.
Because of this, most people who receive settlements have lapsed in payment, usually for a substantial period of time. This, has a devastating effect on a credit score. Now, for a person who already can’t pay the bill that rolls in every month, this is a non-issue. Their credit score is already low, so they have nothing to lose by not paying the companies in order to persuade them into settling. However, for a person who is still paying bills semi-frequently, the credit hit that comes inherent with non-payment can sometimes be a deal breaker when considering a settlement, as it affects everything from health insurance policies to future loan applications. Granted, after the debt is settled and you start paying your newly negotiated bills, your credit score will begin to climb. People need to consider this and how it can impact their life before they begin the settlement process.
Two Avenues of Debt Settlement
Essential, once you decide to attempt to settle your debt, there are two basic avenues to take. One the one hand, there are a host of companies and organizations that, for a substantial fee, specialize in negotiating with credit card companies to get you the best settlement. There are a lot of scams, so be careful. Companies promising upwards of 90% savings are scammers; a fantastic settlement is usually somewhere between 40-50% savings after fees. Some advantages of using a settlement company are: you don’t have to negotiate with creditors yourself, they often employ tactics/have leverage over creditors that the average individual does not have access to, and the good settlement organizations take no fee until they haggle out a settlement that you agree to. The main disadvantage (after their legitimacy is verified) is their fee, as it could vastly impact how much you end up saving.
The other option available is to try and negotiate with the credit card bank yourself. This is an incredibly difficult task, but can be done, though usually without a lot of headache and numerous lengthy phone calls. Some important things to keep in mind are that your credit card will stop working once you begin negotiating, and there is really no guarantee of a happy outcome. However, settlement can often result in a forbearance program, which basically puts the payments on hold for a few months, which for some people is really all that’s necessary. Negotiating is in no way easy, but it is a good first option to attempt on the road to settlement.
Conclusion
Obviously, settlement is not for everyone, and certainly not for the feint of heart or people concerned with the credit score. However, if utilized properly and in the right cicumstances, it can have a huge affect on a person’s life, whether it simply provides a little monetary breathing room of it reduces a large portion of his debt.
