If you’re currently up against a growing mountain of debt, debt settlement is certainly not the only option. Many people will take advantage of debt consolidation because it allows them to preserve their credit history, while still potentially saving on monthly payments and possibly their overall total debt by obtaining a lower interest rate. Still, this option is only really a viable alternative to people who have good credit and few, if any, missed payments.
If your debt has already spiraled out of control, convincing a lender to give you yet another loan may not be possible. Even when it is, the terms might actually work out to more money than you’re already paying. This is why so many people turn to debt settlement instead. Let’s explore...
What Is Debt Settlement?
To reach a settlement with your lenders, you hire a third-party agent to negotiate on your behalf. It’s always a possibility that not all negotiations are successful. A lender has the right to decline to negotiate and to send the delinquent accounts to collections. This is why it’s so important to hire a company that is experienced.
Generally, a program can last anywhere from eighteen to thirty-six months, but the wait is worth it when negotiators are successful. Experian estimates that when they are, you could end up paying back as little as 50% of your total debt. This is fairly accurate as industry standards are 40-60% savings for the consumer.
How Does Debt Settlement Work?
Opting for a settlement is not a decision you should take lightly. Do your research and understand how the process works before agreeing to the arrangement.
- Decide on Your Negotiator
Some people choose a lawyer, while other people choose a company that specializes in settlements. While you try to make a decision, remember to start saving. How much cash you have in hand improves the bargaining power of whomever you choose. Because of this, agents tend to wait until you have enough money to use as the lump sum before making a debt settlement offer.
- The Waiting Period
If you’ve already begun missing payments, this can play into the negotiation process. Most lenders would rather have something than nothing at all, especially when that something is a lump sum payment; that’s why you continue to build your savings/escrow account over time - to be able to make a lump sum offer that is significantly less than what is owed, but still enough for the creditor to be satisfied. Collections agents may also begin to call during this period - another reason to use a company that specializes in debt settlement because you can simply direct a collection call to contact your representative.
- Making an Offer
After you’ve accumulated enough funds, it’s time to make a settlement offer. If the creditor agrees to the offer, then you should get this offer in writing. That eliminates the possibility of them going back on their word. You should also ask them to send a notice to the three major credit bureaus that you have settled the debt.
- Make Payments
There are several parties owed money at this point. The original lender that you owed the money to, your negotiator also charges a fee, which is usually a percentage of what was owed, and finally, keep in mind that the IRS treats the amount forgiven like income, so you’ll owe taxes on this.
What Are the Pros?
Dealing with unmanageable debt, with no end in sight can be stressful, so the first benefit is you begin to feel empowered by taking control of the situation. The most obvious benefit is the opportunity to reduce your debt amount significantly. You would most likely see a reduction in credit card payments, medical bills, or personal loans. If you have high debt in these and other eligible areas, it could help you get your life back on track.
It can also help you avoid filing for bankruptcy. In fact, some people much prefer the dings from a settlement versus bankruptcy. The negative effects of bankruptcy on your credit can last for up to 10 -- much longer than if you were to go the debt settlement route. Lenders may also look at settlements more favorably than bankruptcies when you need to apply for a loan years later.
Finally, while you may have chosen to settle some debts, you may have been keeping up with others, which helps balance things out. Bankruptcies are more likely to negate the effects of this as they take your total financial situation into account.
Is It Right for Me?
Only you can answer this question, but a certified debt relief expert can help guide you in the right direction. Contact Financial Rescue today to see if this or other available options will meet your needs.