Settling and consolidating debt is very common nowadays. In fact, the average American under the age of 35 had $101,970 in debt in 2019 (including mortgage debt).
If you are in debt and currently behind on payments, debt settlement may be the right solution for you. It is an alternative to bankruptcy and will allow you to get rid of a lot of debt for less money than you owe. You can negotiate a debt settlement yourself or use a company to do it on your behalf.
How Debt Settlement Works
Basically, when you negotiate a debt settlement with a company, you offer to pay a lesser amount than what you owe in exchange for being allowed to eliminate the remaining debt. Sometimes you can negotiate a reduction to 30% of the original amount you owed.
Debt settlement only works on unsecured loans or debts that have no collateral such as credit cards or personal loans. For loans that have collateral like your car loan or mortgage, the bank will repossess the item and will not negotiate a different payment.
It is worth mentioning that you must pay the negotiated amount in one payment within a few days of reaching the agreement with the company. For this reason, you should negotiate with one company at a time. Debt settlement will negatively impact your credit score as you are withholding payments from your creditors, but it is better than having a lot of overdue or delinquent debt on your credit report. It may be a better option than bankruptcy.
Advantages of Debt Settlement
Debt settlement can help you resolve your debts much faster than paying them off. Even with the best debt repayment plan, it may take you years to pay off a large amount of debt, which will also delay your other financial goals.
Negotiating a debt settlement may make it possible to deal with your debts rather than ignoring them and hoping they will go away. Debt settlement also allows you to pay off a portion of your debt, which can also be helpful when managing your budget.
Disadvantages of Debt Settlement
Debt settlement negatively affects your credit score as the debts will not show as paid in full. You can only deal with one debt at a time, meaning you may continue to receive collection calls while trying to save money to pay for your debt settlement.
It may take time to settle all your debts, whereas bankruptcy will take care of them faster. You should also keep in mind that you will need to pay taxes on the forgiven amount as part of your debt settlement. For this reason, it’s wise to plan how debt settlement will affect your taxes.
Negotiate Your Debt Settlement Yourself
Although you may work with a debt relief agency or credit counselor to settle your debts, you can also negotiate a debt settlement yourself.
To do this, you will need to be organized. You should list the debts you are currently behind on and consider the amount you currently owe. Try to save about 50% of that amount and then contact the lender to offer that amount as a full settlement.
Also, leave room for negotiation. So it’s wise to offer the lender less than you currently have. If they agree to the amount as a full payment, you should request a letter stating that your debt will be forgiven if you pay that amount. Wait until you receive the letter before sending the payment.
Also, keep a copy of the letter and your debt settlement check. This will protect you in case the company claims you still owe them money. Then, once you settle one debt, you start the process over again with another lender.
Using
Debt Settlement Company or Attorney
You can also use a debt relief company or attorney to settle your debts. A debt settlement company will contact your creditors on your behalf and negotiate settlements.
During this time, you will make monthly payments to the debt settlement company, which will use these funds to negotiate settlements on your behalf.
Keep in mind that debt settlement companies will take a portion of this money as fees for their services.
But make sure to do the necessary research beforehand. It is important to carefully research the company and ensure that it is legitimate and has been in business for several years before working with them. A debt settlement attorney works in the same way as a debt settlement company.
Alternatives to Debt Settlement
There are alternatives to debt settlement. One such alternative is creating a debt repayment plan yourself. Examples of this include the snowball method, where you pay off your debts from smallest to largest. This way, once you pay off the smallest balance, you can put that money towards the next smallest balance, and so on. You can also pay off your debts from the highest interest rate to the lowest.
Credit counseling is another option. A credit counseling service will help you create a budget and work with your creditors to reduce your monthly payments or your interest rate. You will make monthly payments to them, and they will pay your creditors. This is better than debt settlement, but it does impact your credit score. Finally, bankruptcy is another option. It will significantly affect your credit score and make it difficult for you to borrow money in the future.
Was this article helpful?
Thank you for your feedback! Let us know why?
Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editing process to learn more about how we fact-check and keep our content accurate and reliable.
Federal Reserve. “Consumer Finance Survey (SCF).”
Was this article helpful?
Thank you for your feedback! Let us know why?
Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editing process to learn more about how we fact-check and keep our content accurate and reliable.
Federal Reserve. “Consumer Finance Survey (SCF).”
Was this article helpful?
Thank you for your feedback! Let us know why?
Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editing process to learn more about how we fact-check and keep our content accurate and reliable.
Federal Reserve. “Consumer Finance Survey (SCF).”
Was this article helpful?
Thank you for your feedback! Let us know why?
Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editing process to learn more about how we fact-check and keep our content accurate and reliable.
Federal Reserve. “Consumer Finance Survey (SCF).”
Source: https://www.thebalancemoney.com/a-guide-to-debt-settlement-2385859
Leave a Reply