Creditors take risks when they provide unsecured loans. As a result, they would rather get back part of the money the lent as opposed to nothing. The latter may happen when borrowers file for bankruptcy. This is why you might consider trying to settle your debts for less than what you actually owe.
How Debt Settlement Works
The process of settling your debt follows a set pattern.
• If an account is not past due, you stop making payments and become delinquent.
• You, a debt settlement company, or a debt settlement attorney negotiates with the lender or collection agency to settle your debt.
• The lender or collection agency may or may not agree to settle your debt.
• If in agreement, you need to make a lump sum payment to cover for the settled amount.
If you work with a debt settlement company, it might start stockpiling money on your behalf to pay the settlement amount by asking you to make regular payments.
Advantages and Disadvantages of Debt Settlement
Going the debt settlement way comes with its share of pros and cons, and the process does not work equally well for everyone.
Pros of Debt Settlement
• You end up paying lesser than you actually owe
• Collection activity stops
• You get to steer clear of bankruptcy
Cons of Debt Settlement
• Some creditors might not want to negotiate
• You existing debt may increase because of interest and late fees
• Even if you are unable to settle your debt in totality, you might need to pay fees
• It would reflect negatively on your credit report
• The amount you save might come with tax implications
What Types of Debt Might You Settle?
Most creditors have no interest in settling debts that receive timely payments and are current. Debts that are considerably past due and are with collection departments or ones that have already been sold to collection agencies stand better chances.
Debts Older Than Three Years
Settling a debt that was transferred to a collector three or more years ago can reactivate it and show it as an existing collection. You should ideally clarify this with your creditor in advance.
How Big is The Debt?
The size of a debt plays a role. For instance, settling small debts when you are current on bigger debts does not have a significant impact on your credit score. However, the number of accounts you settle has a direct bearing on your creditworthiness.
Debt Settlement Companies Vs. Debt Settlement Attorneys
Instances of debt settlement companies not explaining the risks associated with the process are commonplace. This is because they’re mainly in it for the business, with little to no regards about their customers’ wellbeing. Some even charge significant fees even when they are unable to reach settlements.
A debt settlement attorney , on the other hand, can provide practical legal advice after taking your specific situation into account. Attorneys who specialize in this realm have extensive knowledge about the legalities of debt collection as well as the required negotiation skills. If things so south because a creditor files a lawsuit, your attorney can also represent you in court.
Seek advice from a credit counseling organization to determine if you might be able to manage your finances on your own. If you cannot, you might be better off settling your debt. Once you’ve decided you wish to settle your debt, go through information provided by the Federal Trade Commission surrounding settling credit card debt, as it highlights the risks associated with the process.
While debt settlement may provide just the financial relief you need, it is important for you understand the drawbacks that come with the process. Consider all your other options before making a decision. Should you choose to proceed, working with an attorney might be in your best interest.