Piling debts can make your life more stressful, and you need a way to get rid of your debts before they eat out all your savings. Debt settlement is the process by which a borrower can make a reduced payment to their creditor for all the debts- mostly credit card debts- that they accumulate.
By this agreement, the creditor receives only a portion of what is owed to them, and the debt is considered paid in full. The procedure isn’t as easy as it sounds. There are various parameters that the creditor will consider before they agree to receive a reduced payment.
Why do Creditors Agree to Debt Settlement At All?
When a borrower has piled up thousands of dollars in credit card debts and cannot keep up with the payments anymore, a time may come when they consider filing for bankruptcy. Once he does that, the creditors lose all hope of getting their money back. Since credit card debts are unsecured loans, there are no collaterals the creditors can fall back on to retrieve the money you owe them. By agreeing to debt settlement, the creditors can ensure that they can at least partially recover their money.
By filing for bankruptcy, the borrower also completely ruins their finances. Agreeing to pay one portion of the outstanding amount to the creditors will still offer the borrower a chance to rebuild these finances sometime in the future.
How does Debt Settlement Work?
If you, as a borrower, reach a point when you feel you cannot keep up with the repayments anymore, first approach a debt settlement company. Hiring a professional is a much more prudent step than trying to negotiate with the creditors yourself. They have a lot more expertise in the matter and will use all their resources to reduce the amount as much as possible for you.
Hence, at this point, you stop making payments to the creditors and send your payments to the debt settlement company instead. This will be a reduced payment, agreed upon based on your current financial conditions.
The company would create a savings account for you where your money starts accumulating. The time it takes to touch this threshold where you have enough in the account to merit a discussion, you keep falling behind on your payments still, and your credit score starts going down.
Once the money has reached a particular amount, the company will start negotiating with your creditors for a reduced payment. Some creditors agree duly; others could take weeks to negotiate.
Once your creditors are notified that a debt settlement company is handling your repayments, you can expect that all persistent calls and emails regarding repayment reminders will also stop coming. This greatly reduces the emotional stress that a borrower can face at such a trying time when their finances are at an all-time low.
Why Should you Opt for Debt Settlement?
The first requisite to not needing debt settlement is to manage your finances responsibly. Nevertheless, if you still find yourself in a difficult situation, debt settlement is a good option to get out of a debt trap. This is nothing but taking one loan to pay another until a point comes when you keep on incurring interests and cannot make even the minimum payments on your loan.
The reduced payment can be paid to the creditors in several ways. It could be a reduced yet lump sum payment, compared to what you originally owed. It could be disbursed monthly or could be in the form of debt discharge. By the end of it all, you can expect a written and a signed document stating that the creditor has decided to accept your payment and your debts are considered paid in full.
Fees You Need to Pay to the Debt Settlement Company
Once they have agreed, the company will retain a portion of the money from the savings account as their fees and distribute the remaining amount among your creditors.
Alternatively, they could charge their fees separately at a flat rate.
Some companies may also charge a percentage of the debt you owe or a portion of the eliminated debt, that is, the amount of money they have managed to waiver for you.
In any case, you need to keep in mind that apart from paying the reduced payment, you also need to make provisions for paying the company’s fees. You may also have to bear taxes for the waived amount as, according to the tax laws of certain states, they are considered income.
Yes, opting for debt settlement should be the last option. Once you decide to settle your debt, your credit score will take a plunge, and your credit report will have it on record forever. However, it helps you get out of a loan trap and though, time-consuming, you can start afresh and build your finances from scratch.
