Most of the people in our country are struggling to pay off their debts. The huge debt burden forces them to file bankruptcy to get rid of their debts. However, there is another option that can help debt-ridden people to get out of their debts.
If you realize that you are unable to repay all your debts, then you can settle your debts. Debt settlement comes across as an advisable option to get you out of debts instead of filing bankruptcy.
Though you can approach debt settlement companies to settle your debt, you can settle debts on your own.
In this article, you will understand everything about debt settlement.
What is a debt settlement? How does it work?
Debt settlement is a process where the debtor negotiates with the creditors to reduce the total debt amount. The debt settlement process can be done by the debtors or with the assistance of a debt settlement company.
In a debt settlement process, you should negotiate with your creditors to reduce the debts. Debt settlement works well only when a debtor has been delinquent on payments. Unless a valid reason is stated to reduce the amount of debt, the creditor is not going to accept any amount less than what is originally owed.
Can you consider a debt settlement to settle both secured and unsecured debts?
You can only settle unsecured debts like credit card debts, medical bills, store credit cards, deficiency balances, and utility bills. You can’t settle secured debts like home loans and car loans. However, you can settle private student loans because these loans are nothing but personal loans.
Can you settle the debt on your own?
Though you can settle the debt on your own, the task of negotiating with the creditors can be difficult. Thus, you can consider a debt settlement service to settle the debt.
To settle your debt, you need to enroll in a debt settlement program. The debt settlement program is also known as the debt negotiation program. So, once you enroll in a debt negotiation program, the debt settlement process starts. The debt negotiator in the debt settlement company performs the task of debt settlement negotiation with your creditors to reduce what you owe.
What happens in a settlement program
If debt settlement seems to be the right option for you, then you need to enroll with a debt settlement company to settle your debts. Choose a debt settlement company that will help with the debt settlement. The challenge is to reduce the outstanding balance you owe to the creditors. Thus, you should enroll in the best debt settlement program so that you can find the best negotiator who will negotiate on your behalf with the creditors.
In a good debt settlement company, the debt negotiators are well trained to negotiate with the creditors. They have a better idea of the situation. Because of their expertise, you can expect to get a better debt settlement service. Your creditors can agree to settle your debt and you can get out of the debt by paying a reduced amount.
Debt settlement pros and cons
Though debt settlement is one of the best ways to get rid of the debt, it has some pitfalls. Before you enroll in a debt settlement program, you should know the pros and cons of considering the debt settlement option.
Pros of debt settlement
You need to pay less than you originally owed to the creditors
If there is a successful negotiation between the debt settlement company and the creditor, then you are required to pay much less than what is initially owed on the account. The debt settlement process excels in lowering the total amount you originally owed as compared to a debt consolidation program or debt management plan.
You can save money
If you enroll in the best debt settlement program, then you can save money through debt settlement assistance. The debt negotiator will help you to save money by reducing the total debt amount through a debt negotiation program. Most of the time, the debtor can save less than 50% of the original debt, which can end up saving a lot of money.
You can settle your debt fast
A good debt settlement company can help you get the best debt settlement assistance. Thus, you can settle your debt in a much lesser time than some other debt-relief options.
Debt negotiation eases the burden of debt by creating a concrete plan of action that is achievable for the common person.
You can repay debt more hassle-free
Debt settlement plans allow you to save money in a trust account. The settlement company will disburse the amount among the creditors when you have saved the required amount in the account. So, by enrolling in a debt settlement process, you can get rid of your debts hassle-free.
Cons of debt settlement
You need to pay tax
You may face tax obligations if you decide to settle your debt. Since you are not paying the full debt, you are saving money. Thus, you are entitled to pay tax on the total amount that you have saved through the debt settlement process.
You need to pay a fee
Besides the fees paid to the settlement company for paying the creditors, you need to pay a fee to the settlement company for opting the debt settlement service. However, there is no upfront fee.
Debt settlement can hurt your credit score
Debt settlement processes may have a negative impact on your credit score. If you are unable to repay the debts in full, then it can have negative implications on your credit score. After you settle your debts, your credit report will be updated as “Pay as settled”. Thus, it will pull down your credit score. However, you can negotiate with the creditor to remove it.
Tips to follow when you settle your debt
Be clear in your debt settlement negotiations
If you are facing financial hardship and, due to that you are unable to repay your debts, then the creditors might be interested to negotiate with you. Instead of giving all the details about why you cannot pay the dues, come up with a few sentences that you can consistently use to talk to the creditors. Above all, be honest. Don’t tell everyone a different story, which may backfire.
Talk politely with the creditors
Keep calm while talking to creditors regarding debt settlements. You will worsen the situation if you lose your temper. Simply describe your financial hardships to convince them of the debt settlement. Be on your best behavior while communicating with the collector. Your attitude can make a difference.
Know what you can afford to pay
Before considering a debt settlement, figure out the amount that you can afford and pay. However, if you enroll in a debt settlement process, they will assess your income and tell you how much you can pay in debt settlement.
Lastly, debt settlement has its advantages as well as disadvantages. But if you are drowning in debt, then debt settlement can be the best choice since you can repay debts by paying a lower amount. Yes, the debt settlement process can hurt your credit score, but you can rebuild your credit score with time. You need to add positive information to your credit report. For example, making monthly payments on time, staying within the credit limit and paying the credit card bill in full and within time.
So, instead of not repaying the debt at all, you should pay the debt that you can afford. If you totally ignore your debts, then the creditors will sell your debt to the debt collection agency to collect it. If the collectors win the judgment against you, then you can be sued for the unpaid debts. So, you should settle your debts before they are sold to the debt collectors.