About Debt Settlement
Simply put, Debt Settlement is a way for you to negotiate with your creditors in the hopes of getting them to accept a balance due that is less than the full amount of what you owe them.
Also called debt arbitration or debt negotiation, this approach allows you to reduce your overall debt by agreeing to a reduced balance and then immediately paying this amount in full or setting up a reduces payment plan.
What you need to realize is that the only debts that can be negotiated are credit card debts and sometimes unsecured personal loans. Creditors don’t negotiated new balances on secured loans like auto financing or mortgages. They might re-negotiate the loan to a new term or interest, but they won’t take off some of the debt. Neither can you use debt settlement on student loans. Student loan providers will often negotiate a lower payment or no payment for a time, but interest continues to accrue and they won’t settle the debt for less than you owe. Neither can debts like tax-liens or domestic judgments be settled in this manner.
If you are up to date on your payments and continue to pay the minimum monthly payments, creditors won’t be willing to negotiate a reduced balance. The downside to this is that if you stop paying them with the idea of negotiating a settlement, the balance grows with added late fees, penalties and building interest.
Debt Settlement Negotiation
You can negotiate a settlement for yourself. There are several websites that provide step by step instructions on how to do this, even providing a script of what to say to creditors. You can hire a lawyer to act for you, or use a debt settlement company.
Lawyers will either charge you an hourly rate to negotiate the settlements, or some may have a set fee for this type of service. Debt settlement companies either take a monthly fee for their service or charge a larger upfront fee to negotiate with your debtors. There is expert advice available that suggests you look for a settlement company that will take their payment only if they reach a settlement with your creditor, and then charge you twenty percent or less of the amount they saved you.
Debt Settlement vs. Bankruptcy
If your circumstances have changed and you are considering bankruptcy, you may want to look into Debt Settlement. You can avoid court-mandated control of your funds, payments and dispersal of income, while still reducing your overall debt—sometimes by more than 50%. You wipe the slate clean, or get payments you can handle. Your creditors or lenders get some of their money, and a renewed sense that you intend to payback what you can. By agreeing to a reduced amount, they are hoping you won’t file for bankruptcy. If you file for bankruptcy, the creditors might not get any of the money you owe them.
Debt Settlement and Your Credit Score
In order to get your creditors to settle, you have to already have late or unpaid, payments. So your credit score has been damaged just from this first step. Reaching a settlement is reflected in your credit report and further damages your credit score, but as you settle your accounts the score starts to improve.
There is a lot of advice available on how to improve your credit score. Once you’ve settled your debts, actively focus on following the credit repair guidelines for the things you can control. It may take a little time, but knowing what helps and striving to follow those tips will be worth it.
There are even settlement companies that have credit repair programs as part of their settlement services. Credit repair might require an additional fee. There is something to be said about having someone guiding you during this time, it might help you stay focused and out of more debt.
Your credit report is used for more than just lending purposes so whatever you can do to improve your rating is worth considering. The report might be used by insurance companies to fix a premium price and if you are job-hunting, prospective employers sometimes use the report to verify the character of employees.
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