Debt Settlement
Debt settlement is a method for paying off unsecured loans like credit card balances or medical bills.
Usually, you stop making payments to your creditors and save a lump sum to offer as payment in full.
Then, debt settlement companies negotiate reduced payoffs for your debts.
Debt settlement is a method of debt relief where you or a company you hire negotiates with creditors to reduce the amount you owe on your debt. Sometimes, people refer to debt settlement as debt negotiation or debt resolution—but both terms actually refer to parts of the debt settlement process.
Debt settlement is a method of debt relief where you or a company you hire negotiates with creditors to reduce the amount you owe on your debt. Sometimes, people refer to debt settlement as debt negotiation or debt resolution—but both terms actually refer to parts of the debt settlement process.
A key part of the debt settlement process is debt negotiation. That’s when a creditor agrees to reduce the amount you owe and “settle” the debt for less. Believe it or not, this is a very standard process for creditors and other companies that manage debt. Many creditors routinely settle accounts for less than the amount owed. Your creditors may be among them.
You could try to negotiate and resolve your debts on your own if you have the time and negotiation skills required. If you want to try this tactic, you just need to contact your creditors directly, negotiate with them to reduce what you owe, and get a written agreement that outlines the terms of your negotiation.
Usually, only unsecured debts are eligible for debt settlement. “Unsecured” means the debt isn’t tied to an asset, such as a car or house. Examples include:
1. Credit card debt
2. Department store charge card debt
3. Personal loan debt
4. Medical debt
5. Some private student loan debt
Debt settlement will not work with some kinds of debt, such as secured debt, which is a loan secured by a tangible asset. Examples of debts that can’t usually be negotiated include debt from:
1. Vehicle loans
2. Mortgages or home loans
3. Federal student loans
4. Other government loans
5. Utility bills
6. IRS (overdue taxes)
7. Lawsuits
Resolves all debt enrolled in the debt settlement program: Debt settlement doesn’t just move higher interest-rate debt to lower-interest-rate debt. Debt settlement works to lower the principal balances you owe so you can put it behind you faster than you could with a loan.
Streamlines debts into one monthly payment: You make a monthly deposit into a debt settlement special purpose account in an amount that fits your budget. This deposit could be less than the minimum payments on your credit cards or monthly payments on a debt consolidation loan. It is also usually much less than the monthly payment in a debt management plan offered by credit counseling agencies.
Costs less than alternatives: Debt settlement typically costs less than a loan, since a loan charges interest on top of what you owe. In addition, settling debt generally costs less than what you will pay by making minimum credit card payments.
Has better repayment terms than bankruptcy: Debt settlement programs usually provide better repayment terms than do Chapter 13 bankruptcy filings. Plus, debt settlement helps people get out of debt without leaving a permanent bankruptcy judgment on their record.
No conflict of interest with creditors: Unlike credit counseling agencies that often accept “good faith” payments from credit card lenders, debt settlement companies work only on the consumer’s behalf.
Encourages better money habits: The best debt settlement companies help clients learn to create and use a budget, and incorporate simple personal finance best practices into their lives. Many people also benefit from the discipline required in making regular deposits into their special-purpose account that funds their own debt settlements.
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Impacts credit reports and scores: The debt settlement process requires you to go past due on accounts so that creditors will be willing to negotiate. That requirement can be uncomfortable, and it can result in a negative impact on your credit reports and credit scores.
Creditor or collection agency calls: Because you are falling past due, creditors may continue to contact you. Freedom Debt Relief offers options and information to its clients on how to handle these phone calls.
Potential legal action: Some creditors may threaten legal action or actually take legal action for repayment. A good debt settlement company will support its clients through this process. At Freedom Debt Relief, we offer an optional service with an outside law firm to represent clients should legal issues arise.
The answer to that depends on several factors. Here are a few:
How much debt do you have, and how serious is your problem? Do you have access to money you could offer your creditors? What is your income tax bracket? Are you willing to file bankruptcy? Can you handle the stress of collection calls? Is your credit score high, or has it already been damaged? The reason to consider these factors is that consumers who are not in deep financial trouble usually have less drastic options available – like debt consolidation. And consumers who are entirely insolvent or are facing lawsuits may find bankruptcy the best choice. High earners in the top tax bracket pay more tax on forgiven debt than those in lower brackets. If you’re on the fence, you can contact a debt consultant at a debt settlement company who is trained to answer your questions and help you calculate the cost of debt settlement. Only if you know the cost can you decide if debt settlement is “worth it.”
DIY debt settlement is possible. First, decide how much you want to offer your unsecured creditors to settle your debt, and then make a plan to come up with the money. You’ll have to withdraw, borrow or save this amount before contacting your creditors. If you have immediate access to a sum you can offer, debt settlement goes faster. In most cases, you’ll need to stop making payments for a few months to convince your creditors that you can no longer afford the debt. When you’re ready to settle, contact your creditors and make them an offer in writing to settle your account for less than the balance owed. There are sample letters online that you can copy and use. Do not send any money until you have a written agreement signed by all parties
It depends. You may be able to settle all accounts within weeks if you have access to a lump sum you can offer your creditors – for instance, a 401(k) account you can borrow against or savings account that you can tap. Otherwise, debt settlement timing depends on how long it takes you to save an amount to offer your creditors. You can speed this up by cutting spending, selling unused items, and taking on a side gig for more income. You’ll also stop paying your unsecured accounts and put that money into your debt settlement savings. Once you have saved enough, you or your debt settlement company can begin negotiating with your creditors. Most debt settlements take 24 to 48 months from beginning to end.
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