Debt settlement programs can be the hope for anyone facing high amounts of debt as it can mean a fresh start and a chance to pay less of the debt. However, initiatives of such programs are accompanied by questions and concerns regarding the effectiveness of the interventions, their outcomes, and risks. Debt settlement can be a complex and confusing field and at
Debt Free Counselor we seek to offer guidance for consumers considering this option. In this article, we seek to answer some of the top questions people usually have about the debt settlement programs to assist them in making the right decision.
- What is a Debt Settlement Program?
Debt settlement is a process in which a company negotiates to pay the creditors on your behalf less amount than you owe. This sometimes requires one to make a token payment or installments in an effort to clear the debt.
How It Works:
Instead of paying your creditors, you halt your payments and place your money in a special account.
Once there is sufficient cash, the settlement company approaches the creditors with a view of agreeing on a lower amount of the money owed to be paid.
When an agreement is made, the outstanding balance is considered paid.
- What Makes Debt Settlement Different from Other Debt Relief Solutions?
Debt settlement focuses on reducing the total amount owed, unlike other debt relief options such as:
Debt Management Plans (DMPs):
Assist you to clear the full debt amount gradually, in most cases, at a lower interest rate.
Debt Consolidation:
A type of financing where several debts are paid off with a new loan at a lower interest rate.
Bankruptcy:
A legal process that may discharge or modify your debts but which has credit ramifications.
Debt settlement is actually a middle ground where people who do not wish to file for bankruptcy, but cannot afford to make full payment for the debt, can benefit from.
- Who Is a Good Candidate for Debt Settlement?
Debt settlement may be suitable if you:
- Have significant unsecured debts, such as credit card debt or medical bills.
- Are unable to make minimum payments on your debts.
- Are considering bankruptcy but want to explore other options first.
- Can save enough money for a lump-sum payment or regular contributions to a settlement account.
Not Ideal For:
- Individuals with secured debts, like mortgages or car loans, as these are not eligible for settlement.
- Those who can afford to pay off debts through other means, such as debt management plans.
- Am I Able to Save Money with a Debt Settlement Program?
The sum that you can save varies depending on the total sum of money which you owe to your creditors, to the creditors themselves and on the terms of negotiations. Settlements on average cut down the balances by 30% to 50% of the initial balance excluding fees.
Example:
When you have a $20,000 credit card balance, you may negotiate to pay $10,000 to $14,000 hence saving $6,000 to $10,000. However, the fees charged by the settlement companies may offset the total amount of savings.
- Does Debt Settlement Have Impact on Credit Rating?
Yes, debt settlement is one of those strategies that can be damaging to your credit rating. Here’s how:
Missed Payments:
In the negotiation process, you usually cease to pay your creditors, which results in negative remarks on your credit reports.
Settled Debt:
After a debt is paid off, it remains marked as ‘settled’ instead of ‘paid in full’. This will always be looked at badly by other creditors.
Although the impact is so profound in the short run, it is very possible to rebuild the credit score after changing the financial habits.
- Is Debt Settlement Program Safe?
Debt settlement is safe so long as you are working with a company that is legally accredited. However, there are cons out there in the industry and therefore one needs to be very careful when choosing their service provider.
What to Look For in a Debt Settlement Company:
- Certification from third parties such as AFCC or the IAPDA which are known to provide certification for companies in this industry.
- No hidden charges or any other surprise fees that may be charged for no reason at all.
- Positive word of mouth from the customers.
Debt Free Counselor is committed to being ethical and this means that all our clients are well informed all through the process.
- What are the Fees of Debt Settlement?
A large number of debt settlement companies work on the basis of the fees charged per enrolled debt or the amount that is saved. They are usually charged at 15% to 25% of the enrolled debt.
Example:
If you enroll $20,000 in debt and the company charges a 20% fee, you’ll pay $4,000 in fees.
These fees are typically included in your monthly payments to the settlement account, so you don’t pay them upfront.
- How Long Does the Debt Settlement Process Take?
The timeline for debt settlement varies based on:
- The amount of debt you owe.
- Your ability to save funds for settlement offers.
- Creditor negotiations.
Most programs take 2 to 4 years to complete. Staying consistent with your payments into the dedicated account is key to finishing the program successfully.
- Are All Debts Eligible for Settlement?
Debt settlement is generally available for unsecured debts, such as:
- Credit card debt.
- Medical bills.
- Personal loans.
Not Eligible for Settlement:
- Secured debts like mortgages or car loans.
- Student loans (though separate forgiveness programs may apply).
- Tax debts (though these may be addressed through IRS-specific programs).
- Are There Risks Involved in Debt Settlement?
While debt settlement offers significant benefits, it also comes with risks:
Credit Damage:
As discussed, your credit score will take a hit during the process.
Tax Consequences:
Forgiven debt may be considered taxable income by the IRS.
No Guarantees:
Creditors are not obligated to accept settlement offers.
Collection Efforts:
Creditors may continue pursuing collections or even file lawsuits during the negotiation period.
- Can I Negotiate Settlements on My Own?
Yes, it’s possible to negotiate settlements directly with creditors without using a third-party company. However, this requires:
- Time and effort to contact and negotiate with creditors.
- A clear understanding of your financial situation and legal rights.
- Confidence in handling negotiations effectively.
While self-negotiation can save on fees, working with a professional debt settlement company often leads to better outcomes and less stress.
- How Do I Get Started with a Debt Settlement Program?
If you’re considering debt settlement, follow these steps:
- Evaluate Your Finances:
Determine how much debt you have and whether settlement is a feasible option.
- Research Companies:
Look for reputable debt settlement providers with positive reviews and accreditations.
- Schedule a Consultation:
Many companies, including Debt Free Counselor, offer free consultations to assess your situation.
- Start Saving:
Begin setting aside funds for future settlements.
Debt settlement programs can be an effective way to reduce your financial burden and achieve debt freedom, but they require careful consideration and commitment. By understanding the process, benefits, and risks, you can make informed decisions about whether debt settlement is right for you.
At Debt Free Counselor, we’re here to guide you every step of the way, ensuring transparency, support, and results. Contact us today to learn more about how debt settlement can help you regain control of your finances.