A debt settlement is an agreement between borrowers and lenders to make a lump-sum payment instead of the full amount owed. It is one of the most aggressive and effective debt resolution methods available. However, it is not a debt relief method you should take on lightly.
You have probably heard a lot about the benefits and dangers of debt settlements. Usually, opinions are polarized between those who make or lose money from this service: debt settlement firms and lenders (credit card companies and banks). This guide will provide a comprehensive and balanced look at the benefits and disadvantages of debt settlement so you can become an informed consumer, and decide whether this form of debt relief makes sense to you.
In this article
- 1 The truth about debt settlements
- 2 How does debt settlement work?
- 3 Who should consider debt settlement?
- 4 How much do you owe?
- 5 What is your credit score?
- 6 Do you qualify for a Chapter 7 bankruptcy?
- 7 Do you need a debt settlement firm to negotiate with creditors?
- 8 Benefits and disadvantages of negotiating directly with your creditors
- 9 How to choose a debt settlement company?
- 10 Questions to ask a potential debt settlement firm
- 11 To Summarize
The truth about debt settlements
Lenders are afraid of debt settlements and for good reason. A debt settlement is a powerful tool for reducing your debt liability. It is a last-ditch resort that forces lenders to decide between giving you a break on part of your debt or getting nothing at all.
Debt settlement doesn’t always work but when it does its results are impressive.
How does debt settlement work?
The key is using the threat of bankruptcy as a negotiation tool. Lenders know that bankruptcy can discharge unsecured debt and prefer to get something than to be left standing with worthless promissory notes. If you can convince your lenders that you cannot afford to pay your debt in full, they may agree to a discounted payment instead. How much of a discount are lenders willing to give? It all depends on your negotiating skills and your financial situation.
Remember credit card companies and lenders don’t mind extending the terms of loans as long as you continue paying the interest on your debt. Credit card companies, for instance, love clients who just pay the minimum amount on their account for years if not decades. For it to work, you typically have to stop making payments on your unsecured loans for months or even years.
Not paying your bills is not something you should consider lightly. It will seriously damage your credit history. Eventually, you will also have to deal with debt collectors, which nobody likes. Professional debt settlement firms can help limit the activity of debt collectors but nobody can guarantee you won’t be bothered with collection calls or home visits.
Who should consider debt settlement?
As we explain below, a debt settlement is not the only option available to borrowers. There are serious consequences to debt settlements that should, at the very least, give you pause. However, under certain circumstances, negotiating with your creditors is the smart option.
A debt settlement is the best choice for people who:
- Have overwhelming debt they can’t afford to pay
- Have poor credit or don’t care about getting bad credit
- Don’t qualify for Chapter 7 bankruptcy.
To decide whether a debt settlement is a good option for you, consider these questions:
How much do you owe?
If you only owe a few thousand dollars, you may have less damaging options to consider. For instance, you could: reduce your monthly expenses and follow a payment plan that systematically repays your debt. Consider selling stuff you don’t need, cashing out savings or investments. Friends and family may be willing to help you out.
- Reduce your monthly expenses and follow a payment plan that systematically repays your debt.
- Consider selling stuff you don’t need. The average home has a couple thousand dollars in junk to sell.
- Cash out on your savings or investments. Friends and family may be willing to help you out
- Ask friends or family for help
What is your credit score?
Hurting your credit score is the only real leverage lenders of unsecured loans have on you. If your credit is already bad, lenders are more likely to consider a debt settlement.
Also, if you have good to excellent credit (700 to 850), you may qualify for a reasonable debt consolidation loan. Debt consolidation loans don’t reduce your debt, but they don’t hurt your credit history either. However, be careful about using your home as collateral for your debt consolidation loan. It is rarely a good idea to tie your home to a loan that isn’t a mortgage. You can’t lose your home over unsecured debt, such as credit card debt or personal loans. But you can lose your home if you put it as a security for a consolidation loan. Even if you do qualify for a debt consolidation loan, your current income may make it impractical to even attempt to pay the entire debt. Talk to a debt relief specialist and ask what your best options are.
Do you qualify for a Chapter 7 bankruptcy?
Bankruptcy is another extreme debt relief option that has serious financial consequences. For instance, bankruptcy stays on your credit history longer than the missed payments of a debt settlement and it could disqualify you for certain jobs in the financial industry. However, a Chapter 7 bankruptcy is probably the most effective debt reduction tool around. The catch is it forces you to liquidate most of your assets to pay as many of your creditors as possible. If you own a home, cars, or other valuable property you want to keep, you want to avoid a bankruptcy.
Do you need a debt settlement firm to negotiate with creditors?
No, you don’t. You can do it all yourself. Just like you “can” do your own dentistry, perform your own appendectomy, or represent yourself on a murder one case. It doesn’t mean you should.
Benefits and disadvantages of negotiating directly with your creditors
The big, and only benefit of negotiating directly with lenders is you don’t have to pay the debt settlement firm fees. Debt settlement firmS are not charities. They are for-profit companies staffed by debt relief experts who expect payment for their services. If you negotiate your own debt settlement, you can skip the fees. If your debt is less than $5,000 and you decide debt settlement is your best debt relief option, it may be a good idea to try doing it yourself. Although professional firms get much better settlements, the fees may outweigh the savings when you are dealing with smaller debt amounts.
- Creditor Policies – Certain creditors will not settle directly with consumers.
- Inferior Settlement Terms – Consumers may face less advantageous settlement rates on their own, as opposed to debt settlement companies that have relationships with creditors and can often package bulk settlements.
- Poor Lines of Communication – Consumers may struggle to get hold of decision makers or endure long delays in any negotiations or paperwork processing with the creditors.
- Experience – Every creditor has different processes and procedures in how they determine settlement offers and terms. Not knowing those can leave a consumer in the dark.
- Lack of Support – Settlement Companies have a Customer service department to assist consumers with any questions or difficulties that arise during their program. This support can be particularly valuable, especially in cases where creditors become aggressive. If an account were to escalate to legal status, a consumer settling on their own would need to seek out a third party for help.
- The Fine Print – Unfamiliarity of the settlement process can be intimidating, and mistakes can be made. You will need to beware of fine print and carefully review any correspondence, proposed settlement or agreement with a creditor.
- Legalese / Lack of Familiarity – Settlement Agreements should be reviewed very carefully, perhaps by a third party, to make sure that all the terms are those that are agreed upon.
- Emotional Toll – Settling one’s debt can be an emotionally draining and painful process
How to choose a debt settlement company?
Hiring a debt settlement company is like choosing a lawyer or a car repair shop. We would prefer not to need their services and it’s not always easy to spot the good guys for the companies that give the industry a bad name. Supermoney has surveyed the debt settlement industry and filtered out the reputable companies from those you are best avoiding. By following debt relief best practices we have helped thousands of people settle over $5 billion in debt.
Here are some of the factors we consider when vetting and rating debt settlement firms:
- Guarantee: We prefer companies that provide customer satisfaction guarantees
- Financial Strength: We only recommend firms that are financially sound and well funded
- Expert Staff: Only firms that hire certified debt relief experts are considered
- Accreditation: Companies that are members of the American Fair Credit Council, the largest trade association serving the debt settlement industry.
- Experience: Debt settlement firms need to have considerable experience
- Payment Options: Only affordable companies that offer several payment options
Questions to ask a potential debt settlement firm
Before hiring a Debt Settlement company, consider asking the following questions:
- Are you fully accredited, licensed and compliant with best practice standards?
- Are all your debt specialists certified by the International Association of Professional Debt Arbitrators?
- How long have you been in business and how much debt have you settled for your clients?
Give a summary of your financial situation and ask:
- Will you help me with all of my debts? If not, which ones can’t you deal with?
- Can you still help me if I cannot afford the minimum monthly payment some months?
- What kind of security measures do you take to protect my personal information?
- Am I able to get regular, updates on the status of my account and settlements?
- Is there a money back guarantee if the program doesn’t work for me or I decide to quit?
- When will my accounts be settled?
Debt settlement is a powerful debt relief tool. It’s not for everyone, but in the right circumstances, it can be the best route toward debt reduction. Although you shouldn’t ignore the negative effects it can have on your credit, you shouldn’t buy into all the doom and gloom credit card companies and their representatives, the credit counseling agencies, spread about debt settlements.
Get a with debt relief specialist, by clicking the button below. There is nothing to lose. At the very least you will receive a free debt analysis and get an idea of what your debt relief options.