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Debt Settlement

Carl Andrews

Financial Advisor
Updated: 12/2017

Have you racked up a few bills and started to feel the repercussions of poor financial decisions? Has the thought or fear of missing another payment become more prevalent than ever before? Before you are quick to panic, there are many other credit holders that are in the same situation as you. For borrowers’ sake, there are ample opportunities that are available for individuals in debt – more formally known as debt relief. One example or one opportunity that is available for individuals like you is debt settlement.

Today, debt settlement has built a reputation is the negative light; however, in today’s article, we are going to shine light in an unbiases perspective. Our goal is to highlight both the positives and negatives of debt settlement. The truth is though, debt settlement is a viable option for thousands of credit holders, potentially including you. The negative light that revolves this industry can be attributed to many different factors, some of which we will explore in this article. By the end, you will know precisely whether debt settlement is viable for you, how it works, and how to pick the best debt settlement company for you.

What is Debt Settlement

Once you are deep in debt and you are not sure where the light is at the end of the tunnel, debt settlement is a viable option to help organize your debt and begin crawling towards financial freedom. Simply put, debt settlement is the process where an individual negotiates with creditors to pay less than the total amount owed, as seen in the contract or monthly statements. In most cases, consumers are not the one’s doing the negotiations – debt settlement companies are. These companies are considered the third-party and will handle all of the consumer’s personal finances.

As you might imagine, such a financial venture can be incredibly risky. Through hiring a third-party company to negotiate total debt is seen as a violation of contract by creditors, which is subject to law suits, higher fees, and rates. With that being said, it’s vital that consumers are well educated as how-to debt settlement works and the many different variables that are at play. This is why debt settlement has been named one of the most controversial debt relief programs available to date. However, through proper awareness and knowledge of debt settlement, these debt relief programs can prove to be extraordinarily effective and impactful.

PROS

  • With debt settlement, if done properly, consumers can find themselves saving thousands of dollars, resulting in significantly less stress.
  • When an individual utilizes debt settlement, they will receive expert advice and feedback, depending on the company they choose.

CONS

  • If a creditor does not accept a debt settlement claim, it may leave consumers further in debt.
  • Out of the many different forms of debt relief, debt settlement can leave the biggest mark on one’s credit score and report. This can be attributed to how long it takes for a debt settlement company to settle the debt with creditors. If a company takes 6 months to settle your debt, that is 6 months of missed payments reported on your credit report, which can take months, if not years to fix.
  • Debt settlement programs typically charge hidden fees and penalties that consumers are not aware of.

How does Debt Settlement Work?

Now that we have a basic understanding of what debt settlement actually is, let’s begin exploring and unpacking how debt settlement actually works. As we explained, debt settlement is the process of trying to significantly reduce the amount of debt that you owe to specific companies. In effort to best explain the functionality of debt settlement, it would be best to break it up into three different categories.

  1. Companies

When debt settlement companies, consumers will immediately begin stopping their monthly payments for their unsecured debts. However, the money that was funded to the creditors will be used to pay the debt settlement company. On the debt settlement company end, they will take the money and deposit it into a specific account, which will be disclosed during the application process. From there, the debt consolidation company will begin the negotiation process with your creditors, only once they feel you have enough saved in the personalized account. During this time period, a consumer’s credit report will be impacted, portraying each late payment and fee. At the same time, debt settlement companies are legally unable to charge any upfront fees. In fact, debt settlement companies will make their money based upon your debt or percentage of your debt that was eliminated. All of this information is generally shared during the application process.

  1. Lawyers

Another debt settlement option that is available for consumers is known as a debt settlement lawyer. Typically, most consumer stay away from debt settlement lawyers simply because they are naturally more expensive. Debt Settlement Lawyers will handle matters in an equivalent fashion; however, they may charge by the hour, on top of how much total debt was eliminated and creditors they are needing to settle debt with. In light of this, it’s a generally accepted to use debt settlement companies because of this.

  1. Yourself

The last option for debt settlement that is available is the do-it-yourself method. What many consumers do not realize is, sometimes, you do not need to hire a debt settlement company or lawyer to handle your personal finances. In fact, if you are significantly behind or deep in debt, you can take matters into your own hands. However, we do suggest that, before you are quick to pick up the phone and call your creditors, do the proper research on DIY Debt Settlement. This is a trend that is picking up across the world so there is ample research discussing this technique. In our experience, being honest with creditors is one of the best forms of debt settlement. In sharing your personal experiences and asking for personal requests, you may be able to decrease the monthly payments, reduce the interest rates, or better.

What are other Debt Relief Options

As we said above, there are many different debt relief options, aside from debt settlement, to offer as many possible solutions to individuals in debt. While the purpose of this article is regarding debt settlement, we are going to briefly discuss the other debt relief options that are available for individuals in debt. This is in efforts to ensure that debt settlement is best for you.

  • Debt Consolidation – Debt consolidation is a debt relief program where individuals may choose to take all of their unsecured debt and merge them into one monthly payment. In this done by opening one loan to pay off all significant and outstanding debt.
  • Debt Management – Debt management is debt relief program where individuals enroll in a specific company and receive specialized help for their specific situation. Debt management companies craft debt management plans tailored to a consumer’s needs. This program is most like a debt settlement plan.
  • Credit Counseling – Credit counseling is another debt relief program that is available for consumers. Through seeking credit counseling, consumers may not achieve the desirable results, like debt settlement; however, they may provide valuable information and insight to begin making financially sound decisions.
  • Bankruptcy – Bankruptcy is known as the absolute last resort for consumers. Filing for bankruptcy can and will debilitate an individual’s credit score and report for 7 years; however, it will give them an opportunity to have a fresh start.

Five Tips to Pick the Best Debt Settlement Company

At this point, you have a much better understanding as to what debt settlement is and how it functions. As you can see, debt settlement is not the only debt relief option available to consumers. In light of this, out of the many different debt relief programs, this one has been rated one of the riskiest and most controversial options. So, if you are planning on utilizing a debt settlement company, it’s imperative that you ensure you best a trustworthy company that places your best interests first. Here are five tips that can help accelerate this process:

  1. Check Reputation and Reviews

One of the best pieces of advice that we can give anyone looking to pick the best debt settlement company is to research their reputation. The best way for any consumer to do this is through utilizing the Better Business Bureau. Here, consumers can learn a wealth about a debt settlement company, including their reputation and previous customer reviews. The BBB is a place where consumers can share their personal experience, whether positive or negative. On top of this, consumers can cross-reference accreditations to ensure that a debt settlement company is legitimate.

  1. False Advertising

Another crucial tip that can help in picking the best debt settlement company is through evaluating the companies advertising strategies. What we mean by this is, is the debt settlement company making any false promises or guarantees? If a company is promising to eliminate your debt or fasten the process -this is false advertising. Sadly, this a common practice in the debt settlement industry, which can be discerning to some consumers. However, if you can weed out the bad companies, you can shine light on the magnificent debt settlement companies making a difference providing excellent debt relief.

  1. Fees and Charges

In selecting the best debt settlement company, it’s crucial to take into consideration their fees and charges. If a company is charging upfront fees, high maintenance fees, or other applicable high costs, chances are, they are not worth your consideration. In the debt settlement market, there are ample companies offering great services with minimal fees and charges. With that in mind, it’s advised to stay away from companies that are asking for money in advance, especially before a settlement case has been decided.

  1. Honest Answers

During the process of selecting the best debt settlement company, we highly recommend that consumers take the time to ask questions. For example, you should ask settlement companies whether your credit will be impacted, if they charge upfront fees, or whether debt settlement comes with tax impacts. In this, the best debt settlement companies will provide you with the honest answer, regardless of how positive or negative it may be. For example, when it comes to your credit score, no matter the debt relief program, an individuals credit score will be impacted. When it comes to debt settlement, an individual’s credit score is impacted the most, aside from bankruptcy. In our opinion, a company that is upfront and honest with their program and loan is most certainly worth consideration than those that lie or hide answers.

  1. First Settlement Date

Another pertinent area to take into consideration when measuring a debt settlement company is when the first settlement date would be. Now, it’s important to keep in mind that your first settlement date is incredibly important. During the period that you stop paying your monthly bills to creditors, your credit report will be impacted. The length of time it takes between the your first “missed” bill and your first settlement will determent the impact on your credit score and report. So, the goal here is to find companies that offer reasonable results. Typically, companies are able to plan the first settlement date within the first 90 days of the contract. Companies that are advertising anything under 30 days may seem a bit unreasonable, or a scam.

Taking Control Over Your Debt

If you are currently over your knees in debt, there are many different debt relief programs that are available to help you out. One of the riskier options available to consumers is debt settlement. Here, consumers place their personal finances in the hands of a third-party company, known as a debt settlement company.

Through-out this article, we have shared some very useful tips and tricks that can be utilized to help take control over your debt with debt relief and eliminate it once and for all. While debt settlement is the most controversial, by ensuring that you pick the best debt consolidation company, it can prove to be extremely beneficial.