What you need to know about settling your debts
When you are worried about your unpaid debts and welcoming suggestions from your friends and relatives to solve your debt problems, then you might come across the term ‘Debt settlement’.
You may hear both positive and negative comments about this debt relief strategy.
However, before you make the decision whether or not to settle your debts and become debt free, it is better to have a clear idea about it.
Here’s a brief introduction to the popular debt relief strategy - Debt Settlement.
What is debt settlement all about
Debt settlement is a debt relief strategy with the help of which you can become debt free by paying less than what you owe towards your unsecured debts.
By unsecured debts, I mean a debt where no collateral is attached to, like credit cards, payday loans, medical debt, personal loans, etc. You can settle these unsecured debts.
Now, if you choose to opt for debt settlement, there’s another decision you need to make - whether to enroll in a settlement program or go for a DIY settlement.Check out these 2 types of debt settlement:
Enrolling in a settlement program
When you decide to repay debts with the help of a settlement program, a counselor, on behalf of the company, assesses your financial situation and how much you owe. This analysis helps to decide an amount which you can comfortably pay to the settlement company every month.
An escrow account is created in your name, where the amount, you pay, gets deposited every month.
In the meantime, the counselor contacts your creditors and lenders, explains your financial situation, and negotiates to reduce the payoff amount since you can’t repay the outstanding balances in full.
Once one of the creditors/lenders agrees to a reduced payoff amount and a written agreement is made, the settlement company uses the accumulated funds to pay a lump sum amount and settle the debt.
Thus, you clear your debts, one by one.
A small tip: Make sure the settlement company you choose is a reliable one and which has good experience of settling debts successfully.
Opting for DIY debt settlement
Instead of taking help of a settlement company, you can settle your debts on your own. To do so, you have to negotiate with the creditors and collection agencies yourself.
The process is somewhat similar. Once one of your creditors agrees to a reduced payoff amount, you pay that amount and settle the debt.
By opting for DIY settlement, you can save the amount and use it to become debt free, which otherwise you would have to pay to the settlement company.
However, you should know how to negotiate with creditors and collection agencies to settle your debts.
If required, you can use a debt settlement calculator to check out how much you can save by settling your debts.
Pros and cons of debt settlement
So, what do you think? Is debt settlement is the most suitable option to get rid of your debts? It surely is, but there are cons too.
Check out the pros and cons which can help you make your decision.
Why you can opt for settlement:
- Have to pay less - You can get rid of your debts by paying less than what you owe.
- Single monthly payment - If you opt for a settlement program, you need to pay a single monthly amount to the company. And, if you opt for DIY settlement, you can budget and save a substantial amount in a savings account, with which you can settle your multiple debts.
- A suitable alternative to bankruptcy - Avoiding bankruptcy is possible if you opt for settlement. Your creditors and collection agencies may agree for settlement if they think that bankruptcy is the only other alternative if they don’t agree for settlement.
- Debt collectors may stop contacting you - When you opt for professional help or negotiate for a DIY settlement, the debt collectors may stop harassing you for payments. Can pay off your debts fast - With the help of debt settlement, you can repay your debts relatively fast.
You should be aware of these before you opt for settlement:
- You can’t settle secured debts - As already mentioned, with the help of settlement, you can only repay your unsecured debts such as personal loans, credit cards, etc.
- May have to pay tax - You may need to pay tax on the forgiven debt amount because it is considered as the creditor’s loss and the debtor’s profit.
- It is one kind of gamble - The creditors may not agree for settlement. You can stop making payments for about 6 months and then your creditors might not agree for settlement.
- Credit score may drop - Your credit score may reduce by a few points when you settle your debts.
After you get rid of your debts through settlement, plan a suitable budget and manage your finances efficiently. With time, your credit score will increase, which in turn, will help you have a good lifestyle.