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Debt settlement - How to get rid of debt without filing bankruptcy

If you're knee deep in debt, cannot pay your bills and wish to avoid collection calls, you may consider debt settlement (also known as debt negotiation). This is when you negotiate and reduce the outstanding debt by 40-60% of the amount you owe. The creditor forgives the remaining debt thereby helping you to get out of debt faster.

5 Benefits of debt settlement (or credit card debt settlement)

Whether you go for credit card debt settlement program, or settlement on personal loans, payday loans etc, you get the 5 benefits as given below.

1. Avoid bankruptcy: With debt settlements, you can reduce your debt burden and pay off bills comfortably. You can negotiate with the creditors or collection agency (CA) and settle your debts for as much as you can afford to pay. Thus, you don't need to file Chapter 7 bankruptcy. There are chances of losing your home or car in bankruptcy wherein your assets are sold off to pay your creditors.


2. Single payment: Instead of paying multiple bills each month, you'll have to make a single monthly payment to the settlement company. The monthly payments are accumulated in a trust account in order to be paid off to your creditors/CA after negotiation. So, you can avoid the stress of paying debts at different rates and dealing with several creditors at a time.


3. Avoid unfair collection practices: You can avoid unfair collection practices and harassment by debt collectors if you negotiate a settlement.


4. Eliminate extra charges: The settlement company can try and eliminate late payment fees, if any. Any over-the-limit fees on credit cards can also be minimized or eliminated by way of settlement.


5. Avoid lawsuit & other legal actions: Creditors or the CA can file a lawsuit, get a judgment order and garnish your wages or place lien on your property. You may be able to avoid such legal actions if you're in a settlement program.

How settlement (or credit card debt settlement) works

Debt settlement companies offer a settlement program wherein they negotiate with your creditors/CA in order to settle the debt for less than what you owe. The companies charge an upfront fee for their services. Given below is an example of how debt settlement or credit card debt settlement works.

How credit card debt settlement works - An example

Let's say Jesse owes a total debt of $100,000 on 5 credit cards. She is finding it difficult to keep up with the minimum payments. She has earlier consulted a credit counseling agency but the monthly payments they negotiated with her creditors were too high for her to pay. Jesse doesn't want to file bankruptcy as she does not want to involve the court. So, finally Jesse ends up working with a credit card debt settlement company XYZ. Here are the 4 steps on how Jesse could settle credit cards and pay off her dues.

1. Stop payment to creditors: The representative at the credit card debt settlement company asks Jesse to stop paying her creditors and deposit a certain amount monthly into a savings account (i.e. a trust account that XYZ creates for Jesse).
2. No more handling of collection calls: While Jesse starts falling behind on her payments, she may receive collection calls, which are effectively handled by the representative. Jesse doesn't have to handle such harassing calls on her own.
3. Negotiation starts soon after: As Jesse accumulates good amount of dollars into the trust account, the representative at the credit card debt settlement company starts negotiating with her creditors one by one.
4. Debt is reduced by 40-60%: Finding that Jesse won't be able to pay enough, her creditors agree to accept a reduced amount, say around 40-60% of her outstanding bills.

While Jess pays off one debt, she waits for better offers from other creditors. She makes sure that any extra money coming in would be used to pay off her bills. Finally, after a period of 2 years, Jesse is able to settle credit cards debt with all her creditors.

Whether it's a credit card debt settlement program or one which includes other dues, you should stop paying your creditors initially. Instead, send in those payments to your settlement company. Otherwise, you cannot gather enough funds to settle credit cards dues and other bills.

Once you have enough funds deposited into the trust account, debt settlement (or credit card debt settlement) companies negotiate with your creditors/CA and attempt to stop all collection efforts. Find out the details on how to negotiate credit card settlement (or debt settlement on other bills) from the 6 steps in debt negotiation program.

Debts you can settle

Credit card debt settlement is quite common. Other than unsecured credit cards, medical bills, gas/store cards, personal loans etc can also be settled. But tax debts, alimony, child support, mortgages, car loans and federally insured student loans are excluded from a settlement program.

How much to pay for settlement

Debt settlement companies charge 25-35% of the debt balance that is forgiven under the program. The fees are based on:

• How much you owe in total
• Number of debt accounts you have
• How much you'll save by settlement

How long it takes to settle debts

It usually takes 2-4 years to complete a credit card settlement program or settle personal loans, medical bills and other dues. The period of completion depends upon your total debt amount.

Creditors may not sue after settlement

Once you negotiate debt settlements with your creditors/CAs, they may not come after you for the balance. It is illegal in many states such as Arkansas, Texas, Georgia, Michigan, Washington etc. However, in other states such as Alabama, Delaware etc, the creditor retains his right to sue you under certain conditions.

You may owe taxes

Once you go for credit card settlement or settle other debts, creditors will forgive a percentage of what you owe. This forgiven debt, known as cancellation-of-debt (COD) income, is taxable as per IRS guidelines.

How to choose best debt settlement companies

In order to find out the best debt settlement usa companies, you need to check out the following details:

• Company profile: You need to check the profile and service background of debt settlement companies and then choose the one that suits you.


• Company accreditations: These include the certifications that the debt settlement companies have obtained so far. For instance, you may check their BBB reports and find out what they say about debt settlement (or credit card settlement) companies. There are other accreditations such as being a member of the TASC ("http://www.tascsite.org/index.php"), IAPDA ("http://www.iapda.org/") certification etc.


• Program fees and costs: You need to find out what fees are charged by debt settlement companies. Compare the fees and then choose the best debt settlement usa companies you can deal with.


• Client testimonials: Look out for testimonials and feedback given by debtors on the services of the debt settlement usa companies. You can also ask your friends and associates about reputable debt settlement companies they have dealt with.

Debt settlement program provides an easy way out of debt. However, your credit score is likely to go down when you stop paying creditors and save money for debt settlement (or credit card debt settlement). But you can repair your score by using a secured credit card, or a gas/store card. Such cards are easily available even if you have a poor credit history. Besides, you need to pay off other bills on time while you settle credit cards and other debts using the services of debt settlement companies.

Just in case you don't want to take help from debt settlement usa companies, you can go for do it yourself debt settlement. Use sample letters in order to communicate with creditors/CA. Just make sure you understand how the process works and negotiate in the best possible way.

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