Debt settlement (debt negotiation), is where you negotiate with your creditors to reduce your outstanding balance.X
Companies offer debt settlement programs enrolling in which you can settle your debt for less than what you owe.
Debts you can settle
- Credit cards
- Medical bills
- Gas/store cards
- Personal loans, etc
- Tax debts
- Child support
- Car loans
- Federal student loans
Debt Settlement example
Sally has outstanding balance on:
Credit Card X (15%) - $20,000
Credit Card Y (13%) - $15,000
Personal Loan (12%) - $10,000
Total loan amount - $45,000
After enrolling into the settlement program
She has to pay only $18,000 (40% of the total loan amount)
Sally saves: $27,000 through debt settlement
How much to pay for settlement
Under new FTC Rule, settlement companies cannot charge an upfront fee until:
- It has successfully negotiated, settled/ reduced at least one of your debts.
- There's a written settlement agreement with your creditor.
- You'v made a single payment to your creditor under the agreement.
For Illinois: Under the Debt Settlement Consumer Protection Act, the upfront fee is capped at $50 and the total fees shouldn't exceed 15% of what you save, depend on:
- How much you owe
- The number of debt accounts you have
- How much you save by settling bills
How long it takes to settle
It usually takes 2-4 years to complete a settlement program (depends on your total debt amount).
Creditor suits after settlement
Once you negotiate debt settlements with your creditors/CAs, your creditors may come after you for the original balance, depending on your state's law. If you default on the settlement agreement, you can be sued to collect the settlement amount. So, you should keep paying your bills once you get a settlement agreement.X
- Company profile: Check service background of the debt settlement companies and choose the one that suits you the best.
- Company accreditations: Check the companies' accreditations such as BBB report, TASC, IAPDA etc.
- Program fees and costs: Compare the fees charged by companies and choose the best ones you can deal with.
- Client testimonials: Look for testimonials and feedback given by past debtors. You can also ask your friends and associates about them.
Pros of debt settlement
- Avoid bankruptcy: You can resolve your debt problems and don't have to worry about losing your home or car as in Chapter 7 bankruptcy.
- Single payment: You'll only have to make a single monthly payment to the settlement company.
- Eliminate extra charges: Your late fees and any over-the-limit fees can get eliminated.
- Avoid lawsuit & other legal actions: You will be able to avoid collection suits if your debt settlement program is successful.
Cons of debt settlement
- Credit score drops: Due to late payment or charge-offs, your credit score takes a hit.
- You may owe taxes: The IRS will require you to pay taxes on this forgiven debt which is known as cancellation-of-debt (COD) income.
- Account status on credit report: Unless negotiated with creditors or CA, the account status on your credit report will be updated as "Settled" which creates a negative impact on your score as compared to a "Paid in full" status.
Though your credit score is likely to get reduced when you opt for debt settlement, yet you can repair your score by using a secured credit card, or a gas/store card, easily available even with a poor credit history. Besides, you need to make timely payments on other bills while you settle credit cards and other dues using debt settlement services.
Just in case you don't want to enroll with an online debt settlement company, you can do it yourself. Use sample debt settlement letters to communicate with creditors and collection agencies. Just make sure you understand how the process works and negotiate as best you can.X