If you are overwhelmed by a large amount of debt and falling behind on your payments, you may be considering debt settlement. Perhaps you heard about settlement from a friend, or saw a commercial from a debt settlement company on television that sounded too good to be true. Negotiating away part of your debt can be a wise and viable way for some people to get back on track financially, though the process does have its downsides. Here are a few debt settlement solutions to consider.
The Basics of Debt Settlement
Before talking about solutions, it is important to understand the basics of debt settlement. Debt settlement, also called debt negotiation, involves making a deal with your creditors where they reduce the amount you owe in exchange for one lump sum payment. Through this process, consumers are often able to reduce their debt by 35-50%, sometimes more.
Debt negotiation is only for individuals who are in serious debt. If you earn enough money to make your minimum payments and support your household now, you may wish to consider another option, such as credit counseling or a debt consolidation program. In order to make a settlement with creditors, you must be behind on your payments by at least 3 to 6 months. Additionally, keep in mind that you can only negotiate unsecured debt, like credit card debt, personal loans, or medical bills. You cannot settle on a mortgage, car loans, or student loans from the federal government.
At this point, people may be wondering: if they lose money in the process, why are creditors willing to settle? Benefits to the creditor in this arrangement are significant. First, the creditor avoids paying fees to collection agencies to receive payment for the debt. Most significantly, though, creditors are willing to negotiate because they will likely receive no money if you file for bankruptcy. Creditors settle when they believe you will file bankruptcy if they do not work with you to reduce your debt.
Now that you understand the basics of debt settlement, here are the ways you can go about negotiating with creditors.
Debt Settlement Companies
Working with a debt settlement company is the most common solution people choose. The process is not complex: after you are approved by the company, you begin making monthly payments to them instead of to your creditors. The money is accumulated in a designated account for you, and when the balance becomes high enough, the company begins negotiations with your creditors for you. Since debt negotiation requires you to make a lump sum payment, most creditors are not willing to negotiate until you demonstrate that you have or will soon have enough money to make this large payment. For their services, the debt settlement company will charge a fee, taken out of your savings account.
Using a debt settlement company has both pros and cons. In terms of benefits, creditors are used to negotiating with these companies, and they may be much more willing to “make a deal” with a reputed settlement company than with you by yourself. Experienced companies may be able to make a better settlement as well. Finally, working with a settlement company relieves you of the hassle and stress of negotiating with the creditors yourself.
However, settling through a company has its downsides as well. You will have to pay significant fees to the company. Additionally, there are many settlement company scams who try to take advantage of debt-ridden consumers. Be cautious when signing with a company—check that they are a member of the BBB and of TASC (The Association of Settlement Companies). Look for client testimonials regarding the company. You will also want to be very clear about fees and extra costs upfront and make sure you understand how much the company will take before you sign.
Debt Settlement by Yourself
Another debt negotiation solution is to work with creditors yourself. This method’s chief value is that it allows you to avoid the fees charged by a debt settlement company. Do-it-yourself debt negotiation is possible, but it requires a great deal of research and hard work. You will need to begin saving money for a lump sum payment, and then call each of your creditors individually when you have enough money to bargain. One downside of working by yourself is that creditors may not be willing to lower your debt as much as they would for a debt settlement company. Be firm when speaking with creditors, and research ahead of time to determine what an appropriate payment amount might be.
Debt Settlement through a Lawyer
Finally, if you wish to avoid the hassle of calling creditors yourself but do not want to sign with a debt settlement company, you may consider hiring a private lawyer to make negotiations with creditors for you. Though you will pay fees to your lawyer, this route takes the burden of negotiation off of your shoulders. Creditors may be willing to negotiate more with a lawyer than with yourself, since it shows you are serious about paying off your debt.
Each of these debt settlement solutions can be a solid way to pay off your existing debt and get a fresh financial start. Before committing to debt negotiation, be sure you have considered the process thoroughly and know what options are available.
