Originally posted on https://alleviatefinancial.com/blog/how-debt-settlement-works-your-complete-guide/
The average American has $38,000 in debt. Not only does debt make it harder to obtain a mortgage or buy a car, but being in debt is stressful.
Fortunately, there are a few ways to become debt-free. One of those options is debt settlement.
However, with every option, there are pros and cons, and not all debt settlement companies are legit.
If you’re wondering if debt settlement is right for you and how to do it the right way, keep reading. We’re sharing everything you need to know to make the right choice.
What Is Debt Settlement?
Debt settlement companies are also known as debt adjusting and debt relief companies. These companies claim they can help their customers make new arrangements with creditors such as:
- Reducing the principal balance they owe
- Getting monthly payments reduced
- Having their interest waived
- Settling debts for less than the full amount owed
While these methods sound ideal, there are definite debt settlement pros and cons.
Cons of Debt Settlement
Debt settlement can be risky. You should always do some research and know exactly what agreement you’re entering into before you choose this option.
That’s because debt settlement companies often advise you to stop paying your credit card bills. If you do that, you’ll end up incurring late fees along with penalty interest and some other potential charges.
Also, your creditors will very likely step up their collection efforts against you rather than backing off, including filing a debt collection lawsuit against you.
Fees and No Guarantees
Debt settlement companies also tend to charge expensive fees. Unless the debt settlement company can settle all or most of your debts, you may end up with extra penalties and fees on your unsettled debts. You’ll still be in debt.
Also, not all creditors are willing to work with the debt settlement company you choose. It’s not a guarantee you can settle all your debts using this method.
Often you’re required to put money into a dedicated bank account. This is managed by a third party. And you’ll be charged fees to use this account.
Can Negatively Affect Your Credit Score
Your credit score may be negatively impacted by using a debt settlement service. You may struggle to get credit in the future.
Pros of Debt Settlement
If you work with the right debt settlement company, you could end up lowering the amount of debt you owe. It’s also an option if you want to avoid declaring bankruptcy.
Debt settlement will also allow you to get creditors and collectors to back off. And you can pay off your debts sooner rather than later.
Avoid These Types of Debt Settlement Companies
While there are many legit debt settlement companies out there, you also need to make sure you find the right one to help you. Otherwise, you may end up with more debt than you started with.
Do not work with a debt settlement company if they try to convince you that all your unsecured debts can be paid off for pennies on the dollar. Walk away from any company making guarantees that they’ll make all your debt go away.
Be Wary of These Promises or Guarantees
Debt settlement companies also can’t promise that it can settle all of your debt for a certain reduced percentage. And there is no new government program available that helps bail people out of their credit card debt.
You should also be wary of any company charging fees before they settle any of your debts. They also can’t stop all debt collection phone calls or lawsuits. And a reputable debt collection company will never tell you to stop communicating with all your creditors.
Some people feel as though their only options are between debt settlement vs bankruptcy. Understanding their differences can help you make the right decision based on your specific circumstances.
Different Types of Bankruptcies
Bankruptcies cause more damage to your credit than debt settlement usually does. And there are different Chapters of bankruptcy you can choose from.
Each one has its own set of pros and cons to consider.
Chapters 7, 11, and 13
With Chapter 7, all non-exempt assets held by the debtor are sold to repay your debts. Declaring Chapter 7 stays on your credit for 10 years.
With Chapter 11 you maintain ownership of all your assets as you attempt to create a plan to pay off your creditors. Like Chapter 7, this stays on your credit report for 10 years.
Declaring Chapter 13 stays on your credit report for seven years from the date of filing. After that, the accounts associated with your bankruptcy or debt settlement are then removed from your credit report.
Costs You Money to File for Bankruptcy
It can also be expensive to file bankruptcy. With Chapter 7, you’re limited by income requirements.
If you declare Chapter 13 you’re required to pay at least a portion of your debts to your creditors over five years. A judge decides how much depending on the bankruptcy laws in your state.
You may also need to hire an attorney if you choose to declare bankruptcy.
Alternatives to Debt Settlement
There are alternatives to credit card debt settlement or other types of settlements available to you. Always weigh all your options before making a decision.
Negotiating Your Settlement
Don’t be afraid to contact all of your creditors on your own. You can ask them to reduce your interest rates.
You can also offer them an amount that you can pay immediately. Even if it’s less than what you owe, they may be willing to negotiate with you. Most creditors would rather get some money than none at all.
Talk to your bank to see if they have a hardship program that can help you manage your debts. Just make sure you can afford any reduced payment options your bank offers you.
Earning More Money
Look for ways to earn more money. There are many part-time jobs you can do working from home like becoming a writer or a virtual assistant.
You can also gather up all the clutter in your home that you’re no longer using and sell these items. Some items such as high-end clothing sell very well online. Even lower-end items can be sold for some money on sites like Craigslist.
Transfer Your Balances
For those struggling with credit card debt, you may want to consider a balance transfer. Balance transfers mean you move your credit card debt from one credit card to another.
Usually, the new card is offering an introductory 0% interest offer. However, be aware that there is usually a specified time limit for that 0% interest. Also, the credit card company typically charges a fixed fee or a percentage of the amount transferred.
Do a Comparison of Rates Before You Transfer Funds
Compare how much you’re paying in interest versus how much you’ll pay in transfer fees to see if it’s a good idea to transfer your balance. Also, only do so if you know you can pay off the balance before the card’s 0% promotional period ends.
Otherwise, you end up having to pay more interest on your balance.
Credit counseling is a great idea because you’re provided with a support system to help you navigate your way out of a stressful situation. Look for nonprofit organizations that offer free or low-cost advice on budgeting and debt management.
A credit counselor probably won’t negotiate a reduction in your debt. However, they may be able to work with your creditors to create a working payment plan. They can also help stop late fees and any collection efforts.
Look at Your Current Situation and Offer Tools, Resources, and a Solution
A credit counselor will take a look at your current financial situation. They’ll review items like your credit reports, consumer debt, and household budget. Then they’ll help you devise goals to improve your financial situation.
They can also provide you with tools and resources to help you gain more control over your money situation. Credit counselors don’t just help people struggling with credit card debt.
You can also turn to them for help if you need debt counseling, housing and mortgage counseling, and even student loan debt counseling.
Debt Management Program
A debt management plan is worked out with a credit counseling agency. They work with you and your creditors to create a financial plan.
You then deposit a specific amount of money with the credit counseling agency each month. The credit counseling agency then uses those deposits to pay off your creditors on schedule.
However, there may be a fee associated with a debt management program. Typically agencies charge a set-up fee and a monthly fee. However, if this program if your best option but the fees are too much of a burden, there may be a chance you can get those fees waived.
When to Consider Debt Settlement
If the conditions are right and your creditors all agree to the plan, debt settlement can be a great way to reduce your debts quickly. Make sure you’re working with a reputable debt settlement company.
You also need enough income to pay both the reduced monthly payments and to settle some of the debts for less than the full amount.
Work With Us
Whether you choose debt settlement, credit counseling or debt consolidation, we can help. We’re here to help you find a way out of being in debt.
And we offer a risk-free debt relief assessment. Click here to find out how our program works.