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A big problem many of us face is being shackled with an ever growing amount of revolving credit card debt. Not to mention the interest charges that come along with it.
Often, it isn’t necessarily our fault. Life happened.
One thing led to another and now we’re in over our heads and feels like we’re slowly (or for some… quickly) sinking into a mud pit with no help in sight no matter how many additional payments we make.
“It feels like trying to put out a big fire with a tiny bucket with very little water in it.” – Sarah M.
People who feel this way sometimes look at debt settlement as an option, however if you are in this position it is important to research how it works and the risks associated with it before making a final decision to go down this route.
Below you’ll find insight into how debt settlement works, what the risks are, who should not consider it and who might consider looking into it.
Then at the end, there is a series of questions you can answer to help you decide.
Ok, let’s get started.
What is Debt Settlement?
Debt settlement is a negotiated agreement in which a lender accepts less than the full amount owed, sometimes significantly less, to legally settle a debt.
You can negotiate with them yourself, hire a lawyer, or work with a debt settlement company.
There are several risks associated with this as well so you’ll want to make sure you are fully informed before making a decision.
How Does The Process Work?
The process starts when you call a debt settlement company and tell them about your situation. You give the names of the creditors and the amount you owe. The debt settlement company then gives you an estimate for reducing your debt along with a new, lower monthly payment.
As advised by the settlement company, you stop paying your creditors and instead send payments to the debt settler.
The debt settlement company puts your monthly payments into a savings account. Once the account has grown to a certain amount, the debt settlement company calls your creditors and begins negotiating a settlement. The settlement is an amount lower than your full outstanding balance.
If your creditors agree to a settlement amount, the settlement company pays the creditors and takes a fee for the work of negotiating the settlement. This could be a flat fee or a percentage of the debt that was canceled.
What Are The Risks?
Here are the risks associated with debt settlement:
1 – Success is not guaranteed — There’s no guarantee that a debt settlement company can resolve the debt for significantly less as some creditors or lenders can legally refuse to settle the debt owed.
2 – When the debt settles, you pay a fee — By law, debt settlement companies can’t charge upfront fees. Most of them charge as a percentage of each debt they settle, based on that debt’s balance when enrolling in the program. Some charge a percentage of the debt eliminated by the settlement.
3 – Penalties & interest continue to accrue — Interest will continue to accrue on the debt owed while in the program.
4 – Credit will take a hit — When the debt is finally settled, there will be some damage to your credit score. The report will show the account as “settled” meaning the debt was not paid in full and will stay on the report for seven years. This can impact what happens the next time you look for a loan or line of credit.
5 – Canceled debt amount may be taxable — cancelled debt is generally regarded as “income” and may have to pay taxes on it. Make sure to consult with a tax professional to talk about your specific situation.
Who Should NOT Consider Debt Settlement?
Anyone with less than ten thousand dollars in credit card debt should not consider debt settlement because it will not save enough to be beneficial. It will also not be worth the time spent negotiating with the creditors & lenders.
Instead, if this is your situation, then consider looking at alternatives and ways to pay the balance faster to avoid interest as much as possible.
Who Might Consider Looking Into Debt Settlement?
Individuals with balances of ten thousand or more might consider looking into debt settlement as an option.
The process will start with putting away money in preparation for debt negotiations.
The settlement company will tell the amount needed to save in advance.
A monthly payment will be made into a dedicated bank account for several months or years depending on the monthly budget and anticipated amount to be resolved.
The account will be in your name but overseen by a trustee or account administrator.
As the account is built up, that amount will be used to bargain with the creditors. You will have the final say on the terms of how the amount is used to pay the negotiated amount before accepting an agreement.
Once the negotiations are successful, the debts will be paid off one by one.
For those focused on getting rid of their debt first before working on other financial issues like raising their credit, debt settlement could be the help they need on the journey towards a debt-free life.
Do I Qualify For Debt Settlement?
The first step to gain peace of mind with overwhelming debt is to talk with a real person to see how they can help. If you have more than $10,000+ in credit card debt and are employed full time, please call (210) 871-8727 now to see if you qualify.
Questions? Call (210) 871-8727 now. Lines are open Monday-Thursday 9am-5pm EST and Fridays from 9am-3pm EST.
*If line is busy, keep trying until you connect with someone.