Debt settlement services are normally offered by a third-party organization that can help you to reduce your debts by negotiating with your creditors or debt collectors. You may also negotiate with the creditors and settle your debts on your own. But it also comes with some risks which may create problems for your finances.
Practically, you should usually avoid negotiating with your creditor to settle your debts less than you owe as settling debts may damage your credit score. That’s not all, you might have to pay some tax on your settled amount. In the end, you may notice that you have paid way more than you saved.
If you still consider a debt settlement program, it’s also important to do proper research to avoid debt settlement scams.
The sole purpose of this content is to provide you with tips and suggestions on debt settlement. But before discussing further, I would first like to explain the debt settlement process a bit.
How does a debt settlement work?
Debt settlement normally lowers the number of unsecured debts by negotiating directly with the creditor. On the other hand, it is an opportunity for creditors to collect their unpaid debts as much as possible.
You can settle your debts best when you’re behind on payments. If you’re still current with your debt payments, there’s no logic behind starting a negotiation with the creditor. If the creditor is still getting the money on time, then why should they accept a settlement offer?
So, you really need to be behind on your monthly debt payments for at least 3 months, if you want to initiate a successful debt settlement process.
Once the process begins, you have the option to make two basic types of settlement plans. In both cases, you will make the offer to your creditor to settle your debts on a lesser amount than you owe. But if you look closely, the payment strategy is quite different. Let’s have a look at the plans:
- A single lump-sum payment – You can negotiate with the creditors and try to get them to agree to accept a lump-sum payment and settle the account. The amount is usually less than the total debt you owe to the creditors.
- Monthly payment plan – You may negotiate with the creditor and arrange a payment plan (usually 4 payments) which will give you several months to repay the debts.
The first option is normally more successful than the second one. Most creditors like to get the money as a lump sum payment, rather than getting it in small installments, on a defaulted debt. Typically, creditors will agree to accept payments under a monthly payment plan if it really makes sense to break the total payments over a short time.
You can get help from debt settlement companies, also called “debt relief” or “debt adjusting” companies. The company will provide you with a debt settlement program to get you out of unsecured debts once and for all. They will get authorization from you to contact your creditors on your behalf. After contacting, they will start negotiating with the creditors and make a better repayment plan.
Debt settlement companies will usually charge you a fee, often a percentage of the amount saved by them on your debts.
Now let’s move onto the next stage. Here we will discuss some tips you should consider before settling your debts.
Best debt settlement advice to consider prior to taking the help of settlement
1. Be proactive, stop waiting
Don’t wait for reaching out to your creditor until your account has been charged off. A charge off your account means you are more than six months behind on your payments. A charged-off account is known to creditors as an account that has less prospect of getting repaid again. But don’t forget, being charged off doesn’t mean that you no longer owe the debt.
You should contact your creditors quickly and initiate a debt settlement. Stop waiting and plan a good settlement offer that the creditor can’t refuse.
If you contact your creditors soon with a positive approach, most of them would agree to agree with the settlement offer. If you take too much time to ask them, there’s a probability that they might sell off your account to some third party collection agency for a lower value, and that’ll be considered a loss. So, in this situation, creditors or lenders may do anything to avoid such a loss. So, chances are there that your settlement offer might be accepted sooner than you think.
2. Enroll in a settlement program together if you aren’t single
If you have a spouse or a partner, go and sign up for a debt settlement program together! This is the best debt settlement advice I can give you to maximize your savings. But, you must first consider these things:
- Which one of you is just an authorized user of these accounts?
- How much debt do you have alone?
- How much debt is in your spouse’s name?
- How much debt do you have in both of your names?
- Does it make sense to settle both of your debts, or is only one of yours OK?
If you and your spouse have $60,000 in credit card debt but $45,000 of it is in your spouse’s name, it would be wise for you to maintain your payments instead of settling your debts.
This way, one of you will be able to maintain your good credit. So, if a situation comes where you need better credit, before re-emerging from the effect of debt settlement, you’ll have a good credit record with you.
3. Don’t make an unrealistic offer
If your creditor is ready to accept your offer and allowing you to settle your debts through monthly payments, you must set the payments at a level where you can afford it financially.
When you start negotiating with creditors, try not to set up a debt settlement plan that is unrealistic.
Most of the time, debtors, who are offered a big amount as monthly payments, are only able to make the first payment and then miss the rest of the payments. As a result, they fail to carry on with the debt settlement payment plan. In such cases, the account may be referred to a collection agency.
4. Consider the estimated time of the debt settlement program
Some people might think that settling debts may take just a phone call to the creditor and a couple of months to complete the process. But this is not the truth. Negotiating with creditors may take time. The creditor must accept the settlement offer and agree to the terms you are adding to the offer. Sometimes the creditor may also give a counter offer.
In the end, you and your creditor should find common ground to agree with each other.
But taking too much time to settle your debt may also increase your chances of third party involvement.
Why? That’s because while you’re negotiating for a debt settlement, you’re already behind on your payments for at least 3 months. If you take more time, your creditors may become restless and transfer the account for collection. You may be sued if you are delinquent for 12 to 18 months. So as soon as you are ready to eliminate your debts through a debt settlement program, you should always check the approximate duration of it.
5. Rebuild your credit with proper planning
Debt settlements can harm your credit score almost as bad as bankruptcy. The exact impact on your credit score may vary depending on the other information on your credit report. But if you have a FICO score of more than 700, your credit score may get a blow of between 140 to 160 points.
You need to stop your debt payments for 3 months if you want to join a debt settlement program. Once you settle your debts, it’ll be reflected in your credit report as “paid settled”. You need to stop your debt payments for 3 months if you want to join a debt settlement program. Once you settle your debts, it’ll be reflected in your credit report as “paid settled”.
In this situation, you need to stay calm and focused on rebuilding your credit score. There are some good ways to do the same:
- Check your credit report – Check your credit report on a regular basis from your 3 major bureaus. Dispute errors if you find any and try to remove the bad items asap.
- Catch up on your delinquent payments – After settling a few accounts, try to keep up with your other credit accounts and make the missed payments.
- Pay your bills on time – If you are getting any new loans or credit cards, make sure to pay the bills on time and in full.
- Don’t close old credit card accounts – After settling your credit cards, do not close the accounts. Old credit accounts have a long payment history; use them to rebuild your credit.
- Maintain good financial habits – Track your spending and prepare a suitable budget to allocate your money in different categories. Avoid excessive shopping and use cash rather than a card. Increase your retirement fund to 401(k) whenever you have money in your wallet.