Debt reduction—also known as debt settlement or debt negotiation—has been around for many years and has helped millions of Americans get out of debt. In this article, I’m going to cover the debt reduction process and what you should expect.
The point of a debt reduction program is to lower your principle balance substantially—commonly by 40%—60%—and eliminate the interest rate, thus giving you a chance to get rid of your debt within only a few years. It is a form of debt relief for people who normally have over $7,500 in unsecured debts—such as: credit cards, personal loans, medical bills, collection accounts, etc. What’s required of you—the consumer—in this type of program is a legitimate hardship, whether it is financial or medical.
To get started in the enrollment process, you must first get in contact with a debt reduction company and speak with a debt specialist. The debt specialist will require the most recent account statements or a freshly pulled credit report to determine which creditors are eligible for enrollment in the program and what the current up-to-date balances are. After determining the total debt amount, the debt specialist will give you a quote which will include the program length and program payment. The term length and payment are adjustable to accommodate your needs (the payment is usually lower than what you are paying currently).
The program payment will go to a trust account every single month—it is meant to hold your funds until enough monies have accumulated to pay your creditors (based on agreed settlement amounts). This account is usually held with Noteworld Servicing Center (Key Bank) and is opened in your name, allowing you total access to the account at any given time. The trust account should be FDIC-insured, thus protecting your money regardless of any unprecedented events.
When trying to reduce your principle balances on your accounts it is important to understand the basics of debt arbitration. Delinquency is necessary because it shows your creditors that you truly are experiencing financial hardship. It wouldn’t make sense for your creditors to settle on an account that’s current because they have no reason to think that you’re experiencing problems.
That’s why at the time of your enrollment with a debt reduction company, it is actually good if you’ve been late on your payments or if you have accounts already in collections. It is also fine if you are not late because while making the payments to the trust account—you are doing just that, being late.
Creditors always want to profit as much as possible (thus the interest rates). When a creditor sees that you have stopped paying your account for a certain period of time, they become wary of your potential inability to pay them back and, as a result, they begin to call you trying to collect on that debt or missed payment. If they do not receive a payment after 120 days (four months) they will assign or sell your debt to a collection agency to try to collect it from you.
At this point, the debt reduction company jumps in and, with the money that has accumulated in your trust account, begins negotiating with the, already desperate, collection agencies. Professional debt arbitrators are trained to negotiate with creditors to achieve the lowest settlement rates, resulting in very large savings per each account.
You’re probably asking, “Wouldn’t I hurt my credit score if I stop paying my creditors?” The answer to this question is YES. For those with credit scores above 700, it is not advisable to enroll in such a program, but for anybody already suffering in regards to their credit scores, here is where it gets interesting.
If your credit score has been declining, whether from delinquency or from being overextended, a debt reduction program won’t be too damaging. This is mainly because of how the credit bureaus calculate your score. Let’s have a more comprehensive look at what makes up your credit score:
o 35%—Payment History
o 30%—Amounts Owed
o 15%—Length of Credit History
o 10%—New Credit
o 10%—Types of Credit Used
It may be obvious that delinquency can heavily affect your credit score because payment history makes up 35% of it, but most people don’t realize that having over 40% of your available credit charged (while not paying it down substantially every month) can have a very strong negative effect on your score as well. If you’re making minimum payments every month and you have little available credit left, your credit score is still going down. Frankly, if you’re a “minimum payment maker”, you’re wasting away your time, money and credit score.
When you complete the program, the debts you had are gone and aren’t weighing down your credit score any longer. Now, you will be able to start rebuilding your score and get back on your financial feet within another year or two. On average, the debt reduction program term plus the time it takes to rebuild your credit score comes out to four years.
Debt Free Counselor provides debt relief through debt settlement with free consultations for consumers experiencing medical or financial hardship and are overwhelmed by credit debt including credit cards, personal loans, medical bills, collection accounts, or other unsecured debts. You can fill out our application page and be contacted by one of our debt counselors or you can call now to be connected immediately – (877) 479 – 4545.
