Guide to Debt Settlement
What is debt settlement?
Debt settlement is closely related to debt negotiation. In fact, when you negotiate with a creditor, you are asking them to reduce your outstanding loan or credit card balance to a lower amount, also known as settlement. Depending on your situation, including amount owed, whether it’s a credit card company or personal loan, and how delinquent you are, you can potential get a settlement of 20% to 70% off the outstanding balance.
Why should I try to settle my debt?
To avoid bankruptcy. Most consumers are unaware that they can negotiate their outstanding balances on many types of unsecured debts, such as credit cards, brand affinity credit cards and gas cards and personal loans. Unfortunately, you won’t be able to settle money you owe to the IRS, school loans and any other government debts. Even though, you will have a “settled charge off” on your credit report once you attempt to settle your debts, you will eventually be able to recover your credit score and avoid a bankruptcy on your record. A creditor would much rather settle with you and get paid on a lower amount than you go bankrupt and they receive nothing.
How long will it take to settle?
First, you should stop making your monthly payment in order to save up the money to settle. This is also necessary because many times creditors won’t negotiate with you until you are at least a few months past due. You will take the risk that the creditor will report you to a collection agency, however, remain focused on the goal off paying off your debt. If you get harassing calls from the collection agency, ask them for a report that authorizes them to contact you. Also, contact the creditor to notify them that you want to settle your debt with them. Once you have a settlement agreement, a typical plan can take 2 to 4 years to finish repayments.
Who can I trust to help me settle by debt?
If you choose to hire a debt settlement company, be aware that there are many unreputable firms out there. Make sure they are not charging you high fees such as 15% to 20% of the money you save to pay down the debt or even 25% of the debt you owe. Also, watch out for firms that require you to put your savings into an escrow to pay the debt, but then draw money from that escrow as a fee before the creditor receives anything. Furthermore, ask whether the people who work for the debt settlement company receive a commission for bringing clients in the door. You only want to work with a firm that has your best interest in mind. Finally, keep in mind that some states have made it illegal for these companies to profit from debt management. Check your state laws to make sure.
More information
Debt settlement: A costly escape - MSN Money
Debt Relief Can Cause Headaches of Its Own - NYTimes.com