Are you buried under a mountain of unpaid bills and asking, “Does debt settlement work?” The answer really depends on your financial situation. It can help deal with a lot of debt fairly quickly, but it won’t work for everyone. There are some important factors to consider before choosing this method.
Type of Debt
Only unsecured debts can be included in a settlement agreement. These would include such things as medical bills, credit and department store cards, and unsecured personal loans.
Government and tax bills, student loans, mortgages, auto loans, and any debts that were secured using collateral are not eligible for settlement.
So, if you carry large credit card balances, then debt settlement may be a good solution. However, it you are delinquent in mortgage or car payments, then it is not likely a valid option.
Amount of Available Cash:
A debt settlement agreement usually involves paying an agreed upon lump sum to a lender which is less than the full amount owing. This method will only work if you have access to the funds that can be used to negotiate with creditors.
Since negotiating reduced payoffs can negatively impact your credit score, it should be used as a means of avoiding bankruptcy, and only when all other possibilities have been exhausted.
If you are on the verge of bankruptcy then creditors will likely be willing to negotiate an agreement with you rather than risking receiving no payment at all. In this case, you are probably already significantly behind on your bills, so your credit score is already low.
However, if your accounts are current, or even if you are only a few months behind, it may be better for you to consider credit counseling. This alternative will lower your payments and interest rates while also protecting your credit rating.
In most cases, negotiated reductions of the principal balance owed on debts will be reported to the major credit bureaus and will affect your credit score. This could make it more difficult for you obtain loans in the future.
If you do not plan on borrowing money for a few years, then negotiating your debts down may be a good solution because you will have time to repair your score. However, if you have a family and plan to buy or rent a home or car in the near future, then you may want to consider other options.
The better your credit score, the more affect debt settlement will have. Therefore, if you are already significantly behind on your payments, then this option may not do additional harm. But, you may want to avoid this method of debt relief if you are still maintaining a fairly decent score.
When I got sick, I could no longer do my job, yet I could not get any type of disability or anything.
So I tried debt consolidation and the company took their money up front before they ever helped me. After two years of making payments, I could no longer afford to do so. They stopped collecting for me and didn’t put me in any better position.
I learned after that that these people got all their money. It was not based on their success with me. I would have been better served to borrow the money so I could negotiate with the creditor directly.
If you are late enough they will be happy to negotiate. I have found that they are not likely to negotiate until you have reached late enough status with the company. Pay off your bills and then start anew. The most important thing is not to accumulate any further debt.
Choice of Debt Settlement Company
The debt settlement business is largely unregulated and you must be careful to avoid “scams” that will take your money but do very little to help your situation. If you don’t use a legitimate, reputable company, you could end up deeper in debt or find yourself facing legal actions.
Some companies will advise you to stop paying your bills or communicating with your creditors. Instead, they request that you send the payments to their offices, and they will keep the funds in an account until there is enough to approach your lenders with an offer. The idea is that if several payments are missed, the creditors will be more open to negotiations. Unfortunately, these missed payment will go on your credit record and affect your credit score. This is not a problem if your accounts are already seriously delinquent; however, if your score is still fairly high, you could run into some major problems, especially if the creditors do not accept a settlement offer.
Do some research to make sure that you are choosing a reputable company that will work on your behalf to secure the best deal possible. Debt settlement can work if you use a legitimate company, but it can be disaster if you choose the wrong one. Don’t get stung the way Lydia did:
Credit Report Results
Before signing a reduced principal payment agreement make sure the creditors will report the account as “Paid in Full”. Most of the time, your account will be updated as “charged-off Settled” or “Paid-Settled” unless you stipulate differently during the negotiation process. If you cannot get this included in the agreement, then you may want to reconsider using this option. Of course, a settled account is still better than a bankruptcy, so the decision should be based on the seriousness of your financial situation.
So, Does Debt Settlement Work?
I was unable to work for several months and incurred several thousand dollars in credit card debt.
I quickly became behind in my payments and sought out a 3rd party to negotiate a settlement for my debt.
Initially they wanted $6,000 to clear my $10,000 debt, but after some back and forth negotiating I was able to settle my debt for just under $4,700.
In this day and age of toxic loans and bankruptcy, the settlement company was just happy to recoup a portion of the money owed to them instead of none at all.
Posted by: Clarice
If you are significantly behind on your bills or unsecured loans and bankruptcy seems imminent, then your credit score is probably already low and a settlement agreement will have little impact. In this case, yes, debt settlement is a good solution that can prevent more serious future problems. However, if your amount of debt is minimal and your credit score is still high, then you may find credit counseling or a debt consolidation loan more beneficial.
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