What is debt settlement?
Debt settlement is an attractive way to get rid of your debts for good. Many credit card settlement services promise that they will help you to settle your debt for much less than you owe. In many cases, people are in fact able to repay their debt by having a portion of it forgiven by the creditors. However, we would also like to bring to your attention some downsides of using debts settlement as a relief for your current obligations.
What happens when you settle your debt?
To better understand what debt settlement is and if it will be a good route out of your complicated situation, here is an overview of this process.
- In most cases, people decide to work with professional debt settlement services, rather than settling debt on their own.
- After finding a suitable credit settlement services, you will sign a contract with them. This contract will include info on what the company promises to do for you, its fees, including a percentage of forgiven debt that you will pay them for successfully settling the debt.
- The company will then contact all of your creditors and negotiate them for the lowest debt repayment possible. In most cases, this is a one-time repayment of the whole debt.
- The negotiation process can take up to 36-48 months. During this time, you are asked to stop making any payments on your debts and instead deposit them into a separate account. This is done first of all to show your creditors that you are unable to repay the debt and force them to agree to whatever you offer to pay back. Depositing your money into an account will allow you to accumulate a necessary sum of money (or a big part of it) to pay back the whole debt at once.
- Once the company is able to come to an agreement that satisfies you and your creditors, you will pay the agreed portion of the debt to the creditors and fees as well as the agreed percentage of the debt forgiven for the credit card debt settlement services.
- Your debt will be paid off and you will be able to start a debt free life.
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Things to consider during debt settlement
All this might sound like an amazing solution to your problem. But, unlike debt consolidation, settlement has some negative aspects that you should consider before deciding in favor of this method.
- Debt relief or debt settlement, as it is often called, involves discontinuing making your payment, which not only very negatively effects your credit history, but your interest is also growing.
- In the end, you might pay more than you otherwise would because you would not only have to pay back a portion of the debt (often more than half), but also pay a fee for the services in addition to the percentage (usually about 25% of the debt forgiven or 15% of the total debt) mentioned above. To top that, you will also have to pay takes on the forgiven debt, as it is considered an income.
- Considering the price you will have to pay for the debt settlement, you will need to calculate the maximum amount that is reasonable to settle for and it might happen that your creditors will not be willing to settle for such a low amount. As a result, you will have to pay accrued interest and late fees in addition to the debt you started with before trying to settle it.
Debt settlement is still a great debt relief option for many, otherwise, it would not exist. However, you will not only need to weight all the pros and cons, but also find a reputable debt settlement company that:
- has many successful outcomes and great reviews;
- has all fees and charges are disclosed before an agreement is signed and no fees are charged before a settlement is finalized;
- gives you an estimate of time required and amount that can be saved, but does not promise any results (because no one can know the exact outcome);
- gets your approval before finalizing any negotiation.