Understanding Debt Settlement: Is It Right for You?
Debt settlement might sound like a fancy term, but it’s actually just a way to sort out your debt problems by making a deal with the people you owe money to. Think of it like this: if you can’t pay back all the money you owe, debt settlement could help you at least repay a portion of what you owe.
At Help With Debt, we’re here to help you learn all about this option. Let’s dive into what debt settlement is, who it’s for, and what it might mean for your money situation
What is Debt Settlement?
Debt settlement is a plan you make with your creditors (the people you owe money to) where they agree to let you pay less than the total amount you owe. It’s kind of like getting a discount on your debt. This can sound great, but it’s important to know that the drawbacks ensure it’s mostly for people who really can’t keep up with their payments because they don’t have enough money.
While debt settlement is something you can do yourself (here’s when that makes sense), you’ll probably want to tap in professional help. Help With Debt can connect you with highly reviewed law firms and debt settlement companies experienced in handling negotiations with creditors.
Schedule a free consultation with a Help With Debt Debt Analyst today!
The Good Things About Debt Settlement
- Pay Less Than You Owe: The biggest plus is that you may not have to pay all the money you owe. Creditors often agree to settle for less if they believe it’s the best way they’ll get some of their money back. That means you’re saving on the principal balance and all the interest that you would have paid with making minimum payments alone.
- Avoid More Serious Problems: It can help you avoid bigger troubles like going deeper into debt or going bankrupt, which can really hurt your financial future.
- One Simple Payment: Instead of juggling payments to a bunch of creditors every month, you usually make just one payment into a special account, and then this money is used to settle your debts.
The Not-So-Good Things About Debt Settlement
- Hurts Your Credit Score: Your credit score will likely go down when you first fall behind on your debts. You will see some credit factors improve over time, but for people who are current on their debts this can be a big hit. If you’ve already fallen behind, debt settlement is a great option that provides a plan of action to deal with collection accounts and delinquent debt.
- Fees: You should expect there to be fees involved. Whether it is legal fees to an attorney or negotiation fees to a debt settlement company, most settlement companies charge fee’s equaling a range of 22-29% of your total debt. Fees vary by company and may depend on the state you are in and the level of attorney involvement necessary.
- Not All Debts Qualify: Not all types of debt can be settled. Common unsecured debt like credit cards, personal loans and debt consolidation loans can often be settled, but student loans, car loans, and house mortgages usually cannot.
Best Types of Debt for Settlement
Debt settlement isn’t for every kind of debt. Here’s when it works best:
- Credit Card Debt: This is the most common type of debt people settle. Credit cards issued by financial institutions like Chase, Bank of America, Wells Fargo, Discover and more make up the majority of debt entered into debt settlement programs.
- Medical Bills: If you have a lot of medical expenses and bills, sometimes these can be settled too. It’s important that you are not still receiving ongoing treatment or care as the medical provider may decline treatment due to non-payment.
- Personal Loans: If you got a personal loan that isn’t tied to any asset (like a house or car), you might be able to settle it. Plan to dig out the original loan agreement or copies of emails so a Debt Analyst can understand the specific terms of the loan.
- Repossession Deficiency Balance: When you have a vehicle repossessed, the company will usually sell the car at auction. The amount you owed minus the amount the vehicle is sold for becomes the deficiency balance. The lender can pursue collection of this account, and since they’ve already recovered the asset, the debt is very much able to be settled.
- Debt Consolidation Loans: One risk of consolidation loans is not closing the problem credit cards at the time of consolidation and then winding up with double the debt just a short while later. If that’s the case, you may find your credit card debt and your debt consolidation loans are both eligible for one debt settlement program.
Impact on Your Credit Score
One of the big downsides of debt settlement is what it can do to your credit score. Before creditors will consider accepting a settlement of your debts, you’re going to have to fall behind on your payments for a period of time. The delinquency is reported to the credit bureaus, and when the settlement occurs it is reported to the credit bureaus that your account is ‘settled in full’’ meaning you are not paying the full amount. Both of these are considered negative remarks which are reported to the credit agencies. The negative history of the delinquency will remain for 7 years from the original missed payment.
Throughout the process your credit score will yo-yo a bit. This might make it harder to get loans in the future. But, for many people, this might still be better than not having a plan of action to deal with the debt, going deeper into debt, or even going bankrupt.It’s all about a personal cost-benefit analysis of risk and reward.
Is Debt Settlement Right for You?
Wonder if debt settlement is right for you? Here are some things to consider:
- Can you not afford to pay your full debt?
- When you’re already behind, settlement can be a no-brainer.
- When you’re sacrificing the food you put on the table for the payments to creditors, it may be time to make a change.
- If you’re able to stay current but are frustrated with progress, consider a Debt Management Plan first.
- Are you okay with your credit score going down for a while?
- If you don’t have any credit-based purchases in the next 3-5 years, it may be best to prioritize solving the debt situation.
- Try to avoid settlement when you have a move or car purchase ahead, at least until after you’ve made the purchase.
- Are you comfortable paying fees that might come with settling your debts?
- For DIY-die hards, debt settlement can be a DIY project for those comfortable with organization, negotiation, and patience.
- If you’d prefer peace of mind knowing a professional who knows what makes a good deal has your back and won’t let a collector do any funny business, a debt settlement program may be for you.
If you’re thinking about it but not sure what to do, don’t worry! Here at Help With Debt, we’re not the ones who provide debt settlement, but we know a lot about it and can help connect you with the right people.
Ready to Talk About Your Options?
If you’re stuck on what to do about your debts and wondering if debt settlement is a good move, why not talk it over with someone who knows a lot about it? Schedule a free consultation today with one of our agents at Help With Debt. We’re here to help you figure out the best way to handle your debts and get back on track.
Let’s Find the Best Way to Handle Your Debts Together
Don’t let debt weigh you down! If you’re feeling overwhelmed and need some advice, schedule a free debt strategy session now. We’re here to help guide you through your options and find a plan that works for you.
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