If you’re struggling to make ends meet every month due to most of your monthly income going towards high-interest credit card payments or other outstanding debts, then you may be at a place where you are looking for the best option to help you in getting out of debt.
One option that may work out for your benefit in the short term is debt settlement.
What is debt settlement, and how can it help you get out of debt for less than what you owe?
What is Debt Settlement?
Debt settlement is a way to reduce debt in which the debtor (you) and the creditor (for example, a credit card company) agree to a reduced balance that will be considered “paid in full”.
Typically, there is an intermediary in this process, the debt settlement agency that does the negotiations with the creditor for you.
During the negotiations between the debt settlement company and the creditor, the debtor makes payments to the debt settlement agency, usually at a lower rate than they would be paying to the creditor.
In the meantime, the creditor is not getting paid, and you as the debtor default on your loan.
This may sound like a bad thing, but when you as the debtor are in default to the creditor, the intermediary then has leverage to get the creditor to accept a lower amount of money to pay off the debt as settlement.
After all, a smaller amount of money is much better than no money at all.
In this way, you as the debtor reduce the amount of principal you must pay, get a reduced monthly payment, have your interest waived, and settle your debts for less than the full amount owed.
There are pros and cons to debt settlement.
The pros are mentioned above—chiefly, that the debt will be settled for a smaller amount.
In most cases, the pros end up far outweighing the cons.
These cons include things like the negative credit hit that will hurt the debtor (as the debtor has defaulted on all of their settled debts.)
There also could be stress that will accompany the debt settlement process.
The creditor, such as a credit card company, will be aggressively trying to collect the debt from the debtor, charging late fees and penalties, and may file a debt collection lawsuit against the debtor.
Likewise, debt settlement is not always a guarantee.
It is possible that the debtor will stop payment to the creditor, get increased penalties and fees, hurt their credit, and then the creditor will refuse to settle for a smaller amount, leaving the debtor in a worse place than they were in the first place.
This is why it’s important to make sure that a debtor works with the right type of debt settlement agency.
In order to not end up in more debt than they were in, to begin with, it is important to be picky about the type of agency they work with.
Any agency that makes claims such as “You’ll be paying off your debt for pennies on the dollar” or “We’ll make all your debt go away” is one to be very wary about.
Debt settlement companies can’t make these promises and there is no new government program to bail people out of credit card debt, despite what some agencies may say.
Be careful when picking a debt collection agency!
However, there are good debt settlement companies that do their best and even have programs to help you qualify for a loan to help repay your debts quicker so you don’t have to worry about a potential lawsuit or creditor calls if you qualify.
How to Get Started with Debt Settlement
Debt settlement can be an amazing first step to controlling your finances and achieving financial stability.
Not only can you eventually end up resolving your debt entirely for less than you currently owe, but you can also lower your current debt payments to a reasonable level, allowing you to save more for the future right now.
Getting started with debt settlement is easy!
Request a short conversation with one of our debt experts, and we’ll walk you through the whole process of finding out which debt may be able to be settled, and what that will look like for you financially right now.
Get started today to see how debt settlement can be a lifesaver for you and your wallet.
Some Alternatives to Debt Settlement
By requesting your free conversation with us, we will help you find the very best approach to your personal financial situation.
While debt settlement is often the best approach, there may be instances where another method of debt relief may be appropriate.
Here are some other areas that may help you find some relief from your debts.
There are three forms of the bankruptcy filing.
- The first is Chapter 7, in which all non-exempt assets held by the debtor are sold to repay your debts.
- 2. Chapter 11 allows you keep your assets as you make a plan to pay off your creditors.
- 3. Chapter 13, the “wage earner’s plan”, allows debtors to develop a plan to repay part or all of their debts within three to five years.
All three methods of bankruptcy filing will hurt your credit and stay on your report for 7 to 10 years.
To learn more about how bankruptcy differs from debt settlement, and how to know which is right for you, check out our blog Debt Settlement vs. Bankruptcy: Pros and Cons.
Negotiating Your Settlement
Contacting creditors yourself is another method of debt settlement.
You can possibly negotiate a plan with them to reduce the interest rates and you can offer them a settlement amount.
Even if it’s less than what you own, they may be willing to work with you, because most creditors would rather get some money than none at all.
While we don’t suggest going head-to-head with creditors yourself, it is possible to.
Read more about how this might or might not work for you in our article about How to Settle Debts On Your Own.
Transferring Your Balances
If a debtor is struggling with credit card debt, consolidating that debt to a lower-interest credit card may be a good method, especially as some credit cards offer a 0% interest rate as an introductory offer.
This is usually a limited time opportunity, but it may buy a debtor enough time to get out from under the burden of debt.
While credit counseling won’t get a debtor’s debt settled, it is a good service to help a debtor negotiate the pitfalls of the debt settlement process.
These counselors will teach skills like budgeting and debt management.