Debt Settlement: Learn More About Debt Settlement
Debt settlement is a method of reducing the amount of debt you owe. It involves negotiating with a creditor or collection agency to accept less than what you owe on your bill. The most common types of debt that people negotiate are credit cards and medical bills. However, it’s possible to negotiate other types of personal liabilities through debt settlement as well.
It is often marketed as an alternative to bankruptcy because it allows people who can’t pay off their debts through traditional means to get out from under them. And this is done by paying less and over a period of time—usually up to 24 months.
If you’re struggling with debt and are looking for options, read on to learn more about debt settlement and the risks involved.
This process isn’t bankruptcy and does not require a debt settlement lawyer although you can hire one if you want it. Debt settlement negotiation can be done by yourself and it’s much cheaper than filing bankruptcy.
However, there are some risks associated with this process you should be aware of, including:
- You may end up paying more than you would have if you had just made your regular monthly payments.
- Your credit score will be negatively affected by this process.
- You may have to pay taxes on the amount of debt that is forgiven by your creditors.
- There is no guarantee that your creditors will even agree to settle your debt.
- You may be sued by your creditors if they do not agree to the terms of the settlement.
- The debt settlement company may charge you fees, which will add to the amount that you owe.
- You will likely have difficulty obtaining new credit in the future.
What Is Debt Settlement?
Debt settlement is a contract between you and your creditor that allows you to pay less than the full amount you owe. Your agreement with the creditor usually involves stopping payments altogether, while they agree to write off the portion of the remaining balance of your debt. This process can take several months to complete, so it’s important to understand what involves before committing yourself to it.
However, if you are wondering if debt settlement is worth it, the answer is absolutely yes, because if you cannot afford to pay the debt, it’s a much better option than bankruptcy.
The amount you failed to pay can then (after it has been reduced) be paid as a lump-sum payment or in monthly installments.
There are many companies offering different debt settlement programs, so look into them, before choosing the one that fits you best.
Additionally, you can also choose a debt consolidation vs debt settlement. Debt consolidation is another type of financial strategy useful for reducing the total number of creditors you owe as opposed to debt settlement which is used for reducing the total amount of debt you owe.
How Does Debt Settlement Work?
A debt settlement agreement can be an effective way to reduce your overall debt and get out of debt faster. However, creditors may not agree to a settlement, but if they do, you should expect them to reduce your interest rates and waive penalty fees. Debt settlement can also lead to lower monthly payments through a reduction in principal balances or interest rates, both of which can help improve your credit scores over time. That of course, if you pay everything as agreed on this time around.
Although, you should not forget that after you, or your lawyer, submitted the settlement offer, and it has been approved, the creditor will report the account to the credit bureau as “settled” which will then show on your credit report. This will then stay on your report for up to seven years, and make it difficult to obtain new credit in the future.
What Are the Risks of Debt Settlement?
Now that we explained in-depth what a debt settlement is, let’s further explain the risks we mentioned above.
The first risk of this process is that your credit score will take a hit. Any time you have a debt that is settled for less than the full balance, it will be reported to the credit bureaus as a “settled” debt. This can cause your credit score to drop by 100 points or more.
The second risk is that you could end up owing taxes on the forgiven debt. The IRS considers forgiven debt to be taxable income, so you may end up owing taxes on the amount of debt that is settled.
The third risk is that the creditors may not be willing to reduce the amount you owe at all. If this happens, you will still be responsible for paying back the full amount you failed to pay, plus any fees charged by the debt settlement company.
Overall, there are many risks associated with debt settlement. However, it may still be an option worth considering if you are struggling to pay off your debts. Be sure to speak with a financial advisor or tax professional before making any decisions about settling your debts.
Furthermore, look at the pros of this process as well. Debt settlement will not only help you avoid bankruptcy but also provide you with much-needed relief from the unbearable debt you can now pay off faster. It will also help you avoid being sued and debt being sent off to the collectors.
What Impact Does Debt Settlement Have on Your Credit?
Debt settlement can have a negative impact on your credit. When you settle a debt, the creditor will report it as “settled” or “paid in full” to the bureaus. This will lower your credit score and affect how much interest rates cost you in the future or even the ability to take out any loan at all.
If you can’t afford to pay off all of your bills at once, contact each creditor directly and discuss options for making payments that are affordable for you. Creditors are more likely to work with individuals who show a willingness to pay than those who don’t communicate with them at all.
So, if you are unsure how to negotiate a debt settlement on your own, just schedule a meeting with your creditor and explain why you are experiencing financial difficulties. You may come up with a better plan of how to repay it all without involving any third party.
Lenders just want their money back, so if you can present them with a plan to get a second job or an idea of how to generate additional income, they will likely be open to giving you some time to figure things out and pay them back in full.
In case you succeed in this negotiation, there will be no bad impact on your score. Additionally, by following this new plan, you and the lender agreed on, your score can even get higher if you can make all your payments on time and in full.
Can I Negotiate Debt Settlement Myself?
As you probably guessed it by now, yes, you can negotiate debt settlement by yourself. However, the vast majority of people who try end up worse off than they were before. But why is that?
For one thing, creditors are not obligated to settle with you. They may be willing to work with you if you’re able to make a lump sum payment or agree to a payment plan, but there’s no guarantee they’ll be open to negotiation. And the professionals can be a lot more successful in making them open to further discussion.
Even if you are able to negotiate a settlement, the terms are likely to be less favorable than if you had worked with a professional debt settlement company. Creditors know that most people who try to settle their debts on their own are not familiar with the process and are more likely to accept unfavorable terms.
Additionally, negotiating a debt settlement on your own can be time-consuming and stressful. If you’re already struggling to keep up with your payments, taking on this additional burden is likely to make things worse, not better.
Finally, if you’re not able to successfully negotiate a settlement, your credit score will take an even bigger hit.
Given all of these risks, it’s generally best to leave debt settlement negotiations to professionals. You should also be aware that many companies offer debt settlement services, and the fees they charge can be high. It’s better to have a lawyer or company negotiate for you, as they will know how to get the best terms for your situation.
A good negotiator will know what information is important for creditors to have and what information should not be shared with them (like your tax returns). If you try to make these decisions on your own, there’s no guarantee that everything will go smoothly when it comes time for negotiations with creditors.
When you’re ready to hire a debt settlement company or just a lawyer, it’s essential that you look around at several different sources before making your decision. It can also be a good idea to talk with friends and family members who have used debt settlement services in the past. This way they’ll be able to tell you if they were happy with the service they received and whether or not they would recommend it to you.
Alternatives to Debt Settlement
While we gave you a good look at debt settlement pros and cons, if you are actually considering this option, it’s a good idea to get familiar with the alternatives as well. The most common alternatives include:
- Credit counseling. A credit counseling agency can work with your creditors to create a repayment plan that fits your budget. You will make one monthly payment to the agency, which will then distribute the payments to your creditors.
- Debt consolidation. We already talked about this option, but it will not be helpful if you for example have just a credit card debt settlement and not multiple lenders to deal with.
- Debt management plan. You can create this more manageable repayment plan by sitting down with your lender and providing them with a reasonable arrangement on how you will be able to pay them the money in full.
- Bankruptcy. This will give you a fresh start and will allow you to discharge your debts. However, it should be a last resort as it will have a big negative impact on your credit score.
- Refinancing. If you have a good credit score, you can try to refinance your debt and take out a new loan to cover the previous one. This can be a good idea that can even offer you lower interest rates than the original but also give you some extra cash to work with.
Final Thoughts
When you’re struggling with debt, it can be tempting to look for a quick fix. Debt settlement might seem like an attractive option, but it’s important to understand the risks before you make any decisions.
Debt settlement companies often promise to negotiate with your creditors to reduce your debt. However, there’s no guarantee that they will be successful. The same goes if you decide to negotiate yourself.
There are several other risks to think about as well. For example, if you’re unable to stick to the payment plan set up by the debt settlement company, you could end up being sued by your creditors.
You may save money by reducing your debts, but consider negotiating a lower payment instead of settling for less. If you want to negotiate with your creditors yourself, make sure you have a plan in place and stick with it!
Although debt settlement can help with some situations where bankruptcy is not an option (such as those involving student loans), there are many other ways to reduce or eliminate debt without risking financial ruin so don’t forget to consider them as well.
Before you make any decisions about this process, it’s essential you speak with a financial advisor or bankruptcy attorney. They can help you understand all of your options and make the best decision for your unique situation.
