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How Does Debt Settlement Work? Dos And Donts.

5 credit counselingDebt Settlement can be defined as the process of paying a one-time lump sum payment (rather less than the actual amount) towards the existing outstanding debt amount, the creditor in turns forgives the remaining amount.

In simple terms, Debt settlement is nothing but a compromise the borrower makes with his creditor by agreeing to pay less than he actually owes, due to his financial crisis.

Debt settlement usually works on unsecured loans. Unsecured loans are loans that don’t require a security, such as credit cards, student loans, or medical bills.

When a debtor goes in for debt settlement, his credit history would get affected adversely. So this option should be opted when there is no other way out of the financial mishap.

 

How does Debt Settlement Work?

Debt settlement works only if the only possible alternative happens to be payment default. So it works on the basis of paying off something is better than paying nothing at all.

There are three ways of approach towards the process of debt settlement:

  1. Debt settlement companies:

When you realize that you are not in a position to clear your debts in full, you might think of the option of a debt settlement through a company. These are companies or negotiators, to whom you pay amounts as and when possible. They deposit this amount in an exclusive account created for you. Once you have paid some reasonable amount fit for negotiation with your creditor, the debt settlement company negotiates with your creditor on your behalf.

These companies can’t charge you any fixed amount as fees; however they charge you a percentage of your total debt or a percentage of your discounted debt through the process of debt settlement. Various debt settlement companies have a different charging pattern.

For instance – You owe $20000 and you opt to go in for a debt settlement. There are two agencies for you to choose from.

Company A – Charges 15% of your total debt.

So in this case, the fee you are going to pay is 20000X15/100 = $3000.

Company B – Charges 25% of the eliminated loan amount. Say if your loan is settled at $12000.

Here you are going to pay 8000*25/100 = $2000

Always go in for companies that charge the second type, a percentage of the loan eliminated, because they will take more effort to cut down your loan.

So it is up to you choose a debt settlement company that will work out for you.

  1. Debt Settlement Attorney:

A debt settlement attorney offers to negotiate with your creditors to reduce the amount that you actually owe. While most of the debtors go in for debt settlement companies, few of them still opt for debt settlement attorneys. Debt settlement attorneys are more like bankruptcy attorneys, but these debt settlement attorneys prevent you from falling into bankruptcy in the first instance.

 

The service fee that the attorneys charge for their service varies from case to case. There are various factors like the amount you owe, the amount that is discounted, your residential area, etc., that has an impact on the fees charged.

 

Few ways the attorneys charge:

  • Fixed amount per case.

  • A percentage on the actual debt amount

  • A percentage on the amount eliminated.

 

  1. Doing it Yourself:

You can go in for debt settlement negotiation yourself, if you think that you are well equipped with sufficient knowledge about the industry happenings. When you have nothing more to lose, then you would not find it difficult to negotiate with your creditors.

Alternatively you can take help from the hardship programs that many banks offer for their debtors. Be prepared to take up the reduced payment options if they suit your financial conditions.

The first step towards debt settlement all by yourself is to collect and accumulate as much money as you can. You cannot go in for a negotiation empty-handed so save by all possible means and arrange a decent lump-sum amount.

Last but not the least, honesty is much required. Be frank and true about your financial situation. Do not try to mislead with false information. Remember that your creditors will have access to your credit history.

However avoid doing the debt settlement task if you fall under any of the following categories:

  • Emotional & Sensitive

  • Reserved

  • Don’t have enough knowledge about the finance industry

  • Don’t have the required time for the task.

  • Don’t have effective negotiation skills.

  • If you are not an assertive type of person.

 

5 debt settlementThe Major Dos and Don’ts of Debt Settlement:

When you have decided that debt settlement is the only option left with you to save you from your present financial chaos, then there are a lot of factors that you have to consider. This actually appears to be an intricate process but with due knowledge and expertise this can be done in an effective way.

There are quite a few dos and don’ts that one has to follow to get the best results.

Do’s:

  • Do seek guidance and assistance whenever required. This task being a financial compromise between a debtor and creditor, many legal documentations and paper works would be required. So it is always better to seek advice from experts in this field.
  • Do keep a close watch on your financial track record and also be ready to furnish the data to your creditors to validate your financial situation in order to get your debt settlement done.
  • During the process of debt settlement, always do keep note of all minute transactions and communications that takes place with regards to the debt settlement process. Keep everything on record and official.
  • Do equip yourself with all the principles and practices with regards to debt collection, debt consolidation, debt settlement and the like.
  • Do understand your rights and responsibilities about your debt settlement process.
  • Do seek guidance from credit counseling companies.
  • Do understand the tax implications when you go in for a debt settlement. If the amount that is been eliminated is more than $600, it becomes a taxable amount. For e.g. – If an actual debt of $5000 is settled for $2500, then the eliminated amount of $2500 becomes taxable.

 

Don’ts:

  • Do not wait until your account get’s charged off – A Charge-off happens when your payments fall behind for more than 6 months. The creditor has all rights and possibilities of claiming a tax deduction for an account that is charged-off.

When your creditor marks your account as a charge-off in your credit record, it is going to remain forever in your credit history and will have drastic impacts on your credit record. So it is important to keep constant track of your loans and act instantly.

  • Don’t disregard the after-effects:

Your credit record will hold the records of your debt settlement forever. This means all your future financial goals will get adversely affected. This will create a negative image of your repayment ability in the minds of your future prospective creditors. So always try your best to pay off all that you owe instead of going in for settlements and reduced payment options.

  • Don’t formulate an unrealistic budget or repayment schedule:

Being in a financial chaos already, it is imprudent to work out a plan that is not practically feasible. Proper planning will lead to success, whereas an improper planning is sure to add on to the crunch.

  • Don’t get yourself trapped with an unauthentic settlement company that actually pushes you deep into trouble.
  • Don’t ever give anyone the right to access your bank account.
  • Don’t allow the settlement company to perform any procedures relating to your debt settlement without your written consent.
  • Don’t default on your promises that you make to your creditors relating to the debt settlement process. The promises if not kept up, will worsen your situation.

Recommendations about Debt Settlement:

  • Take time and make a firm and definite choice of who is going to do the debt settlement process for you. However there is nothing wrong in giving a try it the DIY type, the first time.
  • Be true to your point and do not make any false statements about your financial position.
  • Try to reduce your extravagant shopping expenses and shop only what is needed. Remember your credit record is always available for the creditors’ perusal. So you have to prove yourself worthy enough for any act of empathy.
  • Start your debt settlement negotiations with an offer to pay somewhere around 25-30% of your actual debt amount. If you get an offer less than 50%, you probably might go in for that deal, but if the counter offer goes beyond 50%, you might try other ways to settle the debt.
  • Whatever deal you have struck with your creditors, either on your own or through debt settlement companies, make sure that you get each and every term and amounts clearly mentioned and signed in an agreement. Look out for legal terms that might sometimes mislead you. Make yourself double clear about the transparency of the debt settlement agreement.

5 debt settlement companiesDebt Settlement Companies:

Well when there is nothing wrong in trying to settle your debts on your own, there might be scenarios wherein you might seek the help of debt settlement companies to negotiate on your behalf. There are a lot of debt settlement companies that offer these services.

The top most companies that offer authentic debt settlement services are:

  1. National Debt Relief:

With more and more companies mushrooming almost everywhere, National Debt relief offers a reliable and striking deal to its customers. The transparency of the company is a factor to be noted. It has a savings average of around 30%.

Established in 2009, it has its presence in 41 states and has an A+ rating with BBB. It is also accredited with AFCC and IAPDA.

  1. CuraDebt:

It is a company that deals with business debts as its niche. If you are looking for smaller loan amount settlements, this might be the best option for you. It has excellent customer service features. It has a savings average of around 40%.

Established in 2000, it has its presence in 37 states and has been accredited with AFCC and IAPDA.

  1. New Era Debt Solutions:

New Era is a company, which works only on basic debts. The most attractive feature about this company is the “truth & transparency” segment in its website, which provides all information regarding the services available, fee structure, average debt elimination and eligibility criteria. It has a debt reduction percentage of around 44%.

Established in 1999, it has its impressive presence in 17 states and offers services at a very low cost when compared to other established companies. It is accredited with BBB and IAPDA.

Having seen the Top 3 Debt settlement companies, there are also other reliable companies worth giving a try, like Donaldson Williams, Debt Relief a la Carte, ZipDebt, etc.,

Factors to consider while selecting a suitable debt settlement company:

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Factors

1 Ratings & Accreditation
2 Establishment & Durability of the Company
3 Eligibility Criteria
4 Debt Reduction percentage
5 Customer support and assistance
6 Types of debts dealt with
7 Deal closing time
8 An informative website
9 The Fee structure

[PDF]state of lending: debt settlement – Center for Responsible Lending

The Hitches in Debt Settlement:

Debt settlement is undoubtedly one option that helps people to come out of their financial crunch but it is sure to have many drawbacks and after-effects when coming to the credit record side.

  • Debt settlement requires you to pay a lump sum as a one-time payment. This might be a difficult task for few.
  • The debt settlement record is sure to stay forever on your credit history and will definitely affect your credit score calculations for up to four years.
  • Availing of loans and credits in the future will be a nearly an impossible task.
  • Trying the debt settlement process in an inexperienced way might sometimes backfire.
  • Wrong selection of debt settlement companies or attorneys will cost you more and make you more indebted.

Inference:

With lots of options and facilities available for debt settlement, the process need not be as tough as it might seem to be. Due care and diligence, on various factors will make this task a successful one.

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