Paying back less than you owe
Imagine: You, or a third-party firm you hire, can negotiate with your creditors and reduce your debts by two-thirds or more. This is called debt settlement.
Ideally, a debt settlement program will allow you to:
- Actually lower the principal.
- Resolve your debts in months instead of years.
- Keep your debts from appearing on your credit record, because your creditors will mark them as paid.
- Quickly repair any damage to your credit rating.
Video: What is Debt Settlement?
An alternative to loans
Many people who have considered a debt consolidation loan -- which does not decrease the amount owed, often extend the length of time needed for debt resolution and can carry a high interest rate -- give up on that path and move to debt settlement. Debt settlement can provide a speedy way to eliminate debts for the least amount of money while fending off bankruptcy. The fee charged by a debt settlement firm – typically 10% to 25% of the money originally owed – can be less than the total amount of interest paid on a debt consolidation loan.
Squeezing your creditors
A professional settlement manager will try to put the squeeze on your creditors (who truly do want to erase your account from their books) by withholding all payments to them. Sometimes it works; sometimes it doesn’t. It’s important to know that, whether you try to negotiate a settlement on your own or with professional help, creditors can refuse. They can assign your account to a collection agency, which is likely to negatively affect your credit rating and become extremely annoying. However, once a debt collection firm is involved, your offer to settle the debt will probably halt the embarrassing calls.
Qualifying for debt settlement
Debt settlement does not apply to all kinds of debts. Secured loans -- Internal Revenue Service tax debts, government-issued loans, and mortgages – are off-limits. Most unsecured debts, like these in the list below, are applicable:
Credit card bills- Loans for cars and recreational vehicles
- Medical bills
- Unsecured loans and personal lines of credit
And not everyone who has burdensome debts qualifies for debt settlement. Generally, you qualify if:
- You have a minimum of $10,000 in unsecured debt.
- You have hit your credit card limits.
- You can’t make more than the minimum monthly payment on your bills.
Video: Straight Talk About Debt Settlement
Choosing a debt-settlement company
If you determine that settlement is right for you and you can’t handle it on your own, be sure to do your homework and choose a reputable company. The Federal Trade Commission recommends avoiding companies that do the following:
- Say they can “erase” unsecured debt.
- Promise that debts can be paid off for a tiny fraction of what’s owed.
- Tell you that their system will eliminate forever the need for a declaration of bankruptcy.
- Charge high monthly service fees.
- Claim they can have negative information removed from your credit report.
On the other hand, a reputable company will
- Explain at the start how working with them might harmfully impact your credit history.
- Put all details of the plan in writing.
- Help you find ways to restore your credit rating.
But can you do it yourself?
Just as an experiment if nothing else, you can try self-help to solve your problems with creditors before engaging in a program with a debt consolidation company. Creditors might prove to be surprisingly willing to work with you and be grateful that you are at least trying to do all you can in good faith.
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