If you're short of cash, can't pay your bills, and want to put an end to collection calls, you may want to consider debt settlement (also known as debt negotiation). This is when you negotiate with your creditors to reduce your outstanding balances. The creditor forgives the rest of the debt, helping you to get out of debt faster.
In this article, we've highlighted the following sections:
Video on Debt Settlement by Chris
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Debt settlement program - What it is all about
A debt settlement program or plan helps to lower the payment amount through active negotiation with creditors/collection agencies. In this program, creditors agree to accept less than what you owe in return of a lump sum payment.
How settlement works
Once you enroll into the program, the debt settlement USA company will create a trust account for you wherein your monthly payments will be deposited. You'll have to stop sending payments to your creditors. Once you've saved a sufficient amount in the trust account, the settlement company will contact your creditors. They'll explain that you’ve enrolled into a program. As such, they'll handle your collection calls from now onwards. They'll explain that you're going through a financial crisis and you can't pay off the full amount.
Creditors know people enroll into this program as they're not financially strong enough to repay their bills. So, creditors often agree to reduce the payoff amount after talking with debt negotiators. They draw up a written agreement which you need to read it carefully. The payment terms and conditions are clearly written in the agreement. You need to sign it. Thereafter, the settlement company will withdraw your funds from the trust account and pay off debt.
Once you fulfill the debt settlement agreement, the account status will be changed on your credit report as "Paid as Agreed" or "Paid as Settled". You don't owe any more money to your creditors.
Check out the following example to better understand the process:
Sally has 2 Credit Cards and 1 Personal loan
Sally has 1 Citibank credit card at an interest rate of 15% and outstanding balance - $20,000
She has 1 Chase card at an interest rate of 13% and outstanding balance - $15,000
She also has a personal loan at an interest of 12% and outstanding balance - $10,000
Sally's total loan amount is - $45,000
Sally enrolls into the debt settlement program to repay her bills.
This program may allow her to eliminate debts by paying only $18,000 which is around 40% of the total loan amount.
Sally is able to save $27,000 through the program
Creditor suits after settlement
Once you negotiate debt settlements with your creditors/collection agencies, and fully fund the lower payment offers, your creditors may not come after you. If you agree to a negotiated settlement and fail to fully fund the offer, a creditor collector can seek the original balance of your debt because you failed to pay the new agreed terms. In any state, if you default on the agreement, you can be sued to collect the settlement amount. So, it is very important that once you get a settlement agreement, you keep paying as agreed.
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8 Situations when debt settlement plan or program can help you
You can opt for debt settlement plan or program under the following circumstances:
- You're buried in debts
- You're facing financial hardship
- You can't carry on with your payments
- Your credit is in a bad shape
- You've missed out payments
- You're getting incessant collection calls
- You may get sued any time
- You're seriously thinking about bankruptcy
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Types of debts you can settle through a program
The types of debts you can settle through a program include:
- Medical bills
- Payday loans
- Gas/store cards
- Personal loans
- Utility bills
- Credit card bills
Tax debts, alimony, child support, mortgages (if you are still in the home), car loans (if you still have the car), and federal student loans cannot be settled in a commercial settlement program.
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How long it takes to settle debts
It can take as little as a week to settle debts if your accounts are already several months behind and you have access to money needed to fund offers that are negotiated. If you are in debt settlement plan, it can take a couple of years to complete. How long it takes to finish a program depends on each person's total debt amount, who your credit cards are with, and how behind you are when you enroll.
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6 Ways to choose good debt settlement companies
In order to find the best debt settlement companies, you need to research and review the following:
- Company profile: You need to check the profile and service background of the debt settlement companies you are considering. Choose that company which suits you the best.
- Company accreditation's: These include the certifications that companies have obtained so far, such as their Better Business Bureau report. There are other accreditation's available for businesses, such as IAPDA certification etc. Find out if the company is accredited by The Association of Settlement Companies (TASC).
- Program fees and costs: You need to find out what debt settlement companies charge. Compare their fees and choose the companies that best meet your needs.
- Client testimonials: Look for testimonials and feedback given by past clients.
- Debt negotiators: Ask the company if they have IAPDA certified debt negotiators. This is because IAPDA certified negotiators have a profound knowledge on the industry rules and regulation. They'll be able to handle your case in a better way.
- False statements: A good debt settlement company will never make fake claims such as:
- Your accounts can be settled within a week
- Creditors don't have any right to sue you
- Negative trade lines will be eradicated from your credit report
- The company is not regulated by the FTC laws
Last but not the least, ask the settlement company if they offer you some sort of guarantee. Find out what will happen if the company fails to reach an agreement with your creditors.
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Debt settlement pros and cons you need to consider
Whether you choose a credit card debt settlement program or you settle personal loans, payday loans etc, here are some debt settlement pros and cons that you should be aware of.
Pros:
- Avoid bankruptcy: With debt settlement solutions, you can resolve your debt problems and don't have to worry about losing assets in a Chapter 7 bankruptcy.
- Single payment: Instead of paying multiple bills each month, you'll only have to make a single monthly payment to the settlement company. You avoid the stress of paying debts at different rates and dealing with several creditors.
- Avoid unfair collection practices: You can avoid unfair collection practices and harassment by debt collectors if you negotiate a settlement.
- Avoid lawsuits & other legal actions: Your creditors or collection agencies can file a suit to get a judgment lien and garnish your wages. You will be able to avoid collection suits if your debt settlement program is successful. Risks will be eliminated quickly if you repay the bills fast.
- Save your hard earned dollars: Debt settlement solutions help you save a substantial amount of money by lowering the payment amount. For instance: Your total outstanding balance is $25,000. Creditors agree to lower the amount to $15,000. This means you're actually saving $10,000.
- Won't have to pay extra fees: The company will request your creditors/collection agencies to waive off the extra fees and penalties.
Cons:
- Credit score drops: In a settlement program, you're asked to stop paying your creditors until you save enough to make either a lump sum payment, or can budget for a settled and reduced balance with payment terms of a few months. Many people will settle bills only after accounts are charged off. Due to late payment or charge-offs, your credit score takes a hit.
- You may owe taxes: Once credit cards reach settlement remove, creditors will forgive a percentage of what you owe. The IRS will consider any forgiven debt amount (cancellation-of-debt) over $600 as income. If you qualify as insolvent (you owe more than you own), you can escape the tax.
- Account status on credit report: Unless negotiated with creditors or collection agency, 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. When you couldn't afford to pay your bills on time to begin with, this is an acceptable trade-off to avoid bankruptcy. Your credit report and your credit score can and will recover given time, after a debt settlement program has been completed
How much to pay for settling your accounts
Under the new FTC Rule in 2010, settlement companies cannot charge upfront fees for their services until:
- The debt settlement company has successfully negotiated, settled or reduced at least one of the accounts you have.
- There is a written settlement agreement between you and your creditor.
Under the Debt Settlement Consumer Protection Act enforced by the State of Illinois, the upfront fee is capped at $50 and the total fees shouldn't exceed 15% of what you save under this program. There are additional states that have passed laws recently governing how a debt settlement company interacts with consumers. The fees you pay under a settlement program depend on:
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- how much you owe
- the number of accounts you have
- how much you save by settling bills
5 Credit card debt settlement tips and tricks
You can settle your credit card bills in 2 ways - (a) on your own (b) through a settlement program. Whatever is your decision, you'll need to use the following 5 credit card debt settlement tips and tricks to grab the best deal.
- Check the statute of limitations period: The statute of limitations (SOL) period is the time frame within which creditors/collection agencies have full right to take legal steps against you. Check out the SOL period in your state to find out if you can get sued. If the debt is within the SOL period, then opt for debts settlement as quickly as possible.
- Evaluate your settlement offer: Analyze your settlement offer and see if you're happy with it. If you think that your current financial situation entitles you to get a better offer, speak with the company. Do let them know what it is there in your mind. The credit card debt settlement company will negotiate with your creditors accordingly.
- Ask for a written agreement: Verbal debt settlement agreement doesn't work these days. It is totally insignificant. No matter what the company says, always ask for a written agreement. Make sure you keep all the correspondence from the settlement company or the creditor. If any of them breaks promise, you can show the copy of the document.
- Check the account status: Pull your credit report and check the account status. Find out if the account is really delinquent or past due. Make a special note if the account has already been charged off.
- Calculate your income tax: You'll have to pay tax to the IRS if your total saved amount is more than $600. You'd have to report it in your income tax returns. Calculate how much you've to pay on the tax. If you're worried about your taxable income, then contact an experienced tax consultant.
Debt settlement do's and don'ts
Check out the 5 settlement do's and don'ts that you need to know.
Do's
- Seek debt settlement help before your account gets charged off.
- Submit financial documents such as pay stubs, assets, debts, income tax returns, etc.
- Accept a realistic settlement plan.
- Check your credit report after the accounts are settled.
- Do read the terms and conditions of the agreement
Don'ts
- Don't wait for too long.
- Don't ignore the ill effects of settling your accounts.
- Don't accept a settlement plan without analyzing your affordability
- Don't work with a bad company
- No need to pay upfront fees to the company
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4 Benefits of debt settlement online programs
An online debt settlement program helps you lower the outstanding balances just like a normal settlement program. The only difference is that you get the services online.
Find out the 4 benefits of working with a debt settlement online company.
- You can get debt settlement services within a few clicks
- You can have your accounts settled speedily
- You can check if the company is legitimate
- You can make a comparison between various online settlement companies
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How to avoid settlement scams
Emergence of shady debt settlement companies has posed a serious threat in the financial industry. These companies help people to get into deeper financial problems. So, if you really wish to repay your bills without getting into bigger monetary problems, then do check out the tips to avoid debt settlement scams.
- Avoid paying advance fees to the company: As per the FTC rules and regulations, companies offering debt settlements can't accept financial compensation in advance. They have to successfully negotiate with the creditors and reduce/settle at least one account of the consumer first.
- Avoid working with a company without an address: A good company will have a physical address or a proper phone number. On the other hand, a scam settlement company would prefer to talk with you via phone. They would give wrong debt settlement advice without even working on your case.
- Stay away from companies that give vague information: This program is not without any flaw. If the company highlights only the positive sides of the program and refuses to talk about tax and credit score, then it is better to stay from them.
- Don't work with a very young company: Usually, scam companies can't survive for a long period of time. So, it is better to work with a company that has been working with the consumers for nearly 5-10 years.
Debt settlement programs provide an effective and faster way to get out of debt. Your credit score is likely to go down when you stop paying creditors and start saving money for settling your account. But you can repair and improve your credit score. Keep in mind that settlement is your alternative to bankruptcy which impairs credit too. Also understand that when you are struggling with too many unpaid bills, you don't have a credit problem - you have a debt problem. Settling will allow you to keep up with bills you need to make timely payments on. You may be surprised at how quickly you can bounce back with your personal finances once your bills are paid .
