If you want to manage multiple types of debt with one monthly payment, debt settlement is an excellent option. A debt settlement company (sometimes called a debt relief company) will negotiate your debts to help you get better monthly payments and interest rates. In some cases, they may even be able to reduce some of your current debt balances. Once you’ve paid your debt relief company a single payment, all of your debts will be paid off.
There will typically be a fee charged for debt relief services. Avoid predatory companies that make lofty promises, and instead work with legitimate agencies that aren’t scams.
Debt Settlement Basics
Alternatively known as debt negotiation, debt settlement involves paying off a portion of your debt in one lump sum that is usually much less than you owe.
For the borrower, debt settlement can provide financial relief and put them on the path toward rebuilding their credit. For the creditor, debt settlement enables them to receive at least some of the money they’re owed rather than nothing at all. Moreover, it may mean the borrower can avoid filing for bankruptcy. However, some experts say that bankruptcy may be the best option in certain situations.
In general, debt settlement involves payments you owe to credit card issuers. However, you may also be able to settle other unsecured debts.
Debt shouldn’t overwhelm you
There are services that can help you manage and consolidate your debt. Once you know your credit score and have an overview of your debt, you can begin taking action.
While becoming debt-free is probably your main goal, it may be best to start smaller, depending on your situation. The best way to get started is to make consistent payments and follow your plan. Whether you’re a credit counselor or a debt settlement company, debt relief experts can help you.
How debt relief affects your credit
You may experience negative credit effects from a debt settlement, particularly if your company suggests you do not repay debts while the negotiation process is ongoing. If you miss too many payments, your debt may be sent to collections, which would also affect your credit score.
In addition, if you don’t pay high-interest debt, it will grow quickly – even during the debt settlement process. In fact, after adjusting for late payment fees and debt settlement fees, you may end up deeper in debt than when you began.
It is advised not to work with companies that tell you to stop communicating with your creditors. Be aware that if you pursue debt settlement, your access to credit products may be affected because debt settlement companies focus on reducing your debt rather than repairing your credit.
Beware of debt relief scams
You may be able to get out of debt more easily with debt relief programs, but there are plenty of scams out there as well. Consumer Financial Protection Bureau (CFPB) warns consumers to avoid companies that guarantee that debt will go away or that you can pay pennies on the dollar. Also, make sure no fees are being charged before your debt is settled.
It’s a good idea to check if there are any consumer complaints against the debt settlement company you’re considering — your state attorney general or local consumer protection agency can help you find out if any have been filed. Several states also require debt settlement companies to be licensed and regulated.
Generally, you should avoid debt settlement companies that:
- Fees due before your debt is settled, payable upfront
- Provides a guarantee of debt elimination or specifies a percentage of debt reduction
- You are told to stop communicating with your creditors
- Stops debt collectors’ calls or lawsuits
Prior to committing to a debt relief program, it’s a good idea to get a second opinion. You may be able to negotiate your debts and create your own debt management plan, which will save you money on fees charged by debt settlement companies. You can get some advice about your debt from many credit counselors for free.
Debt settlement process
Debt settlement is the act of negotiating with creditors to reduce overall debts in exchange for a one-off payment. When successful, it involves the creditor forgiving a percentage of the total balance. This process generally only applies to unsecured debts, such as medical bills and credit card debt but not public student loans, auto financing, or mortgages. It provides an advantageous opportunity for borrowers who are looking to avoid bankruptcy and its associated ramifications, while still being able to make substantial savings on their account balances – often in excess of 50%. From the creditor’s perspective, a successful settlement conveys the debtor’s commitment to pay back what they can so that bankruptcy does not become necessary.
Negotiating with a collection agency or junk debt buyer is not unlike haggling with the original creditor. These entities may be willing to settle for lower than the full amount, given that they purchased the debt at a fraction of its face value. Furthermore, when coming to terms, the consumer may ask that the mark be taken off their credit report – something that would not be possible if dealing with the first lender.
There are limits to debt relief
To reduce your debt, debt relief companies will negotiate with your creditors and reduce your debt. In essence, you agree to stop paying your creditors and instead pay money into an escrow account managed by the debt relief company each month. This escrow account usually comes with a fee.
As you continue to miss payments, your creditors will continue to lose money and may be willing to settle for less than what you owe. However, not all creditors will work with debt settlement companies, warns the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB). Missing payments may negatively affect your credit score as well.
As well as federal student loans and state and federal taxes, debt relief companies are unable to help with debts secured with collateral, such as auto loans or home mortgages.
Frequently Asked Questions:
What is the process of debt relief?
When you decide on a debt settlement plan, you’ll make regular payments to the debt settlement company in order to pay off your remaining debt.
Is debt relief going to eliminate my debt?
Most debt relief programs reduce your debt burden by setting up a more manageable repayment schedule. Your entire debt will not be forgiven, but you may be able to reduce the overall amount you owe.
How much does debt relief cost?
Credit counseling services, which are similar to debt relief services, come at a cost as well. Debt relief services aren’t free, and you’ll have to pay a percentage of the debt you’re paying off.