Debt Settlement: How It Works and Risks You Face

In today’s modern day and age, everyone finds themselves in some sort of a debt situation. To get it out of the way, the best course of action for anyone is to seek professional help. The key is finding the right organization and service providers to ask help from. One of the possibilities that can occur is a debt settlement. It is a situation in which a creditor is agreeing to an amount less than that what we already owe them. This is a service that is typically offered by third-party companies that will claim to be able to reduce our debt. They do this with negotiation with our creditor. Here are some of the key points to go over when considering negotiating a debt settlement.

1.    The process itself

Debt settlement happens when we have too many late or skipped payments. Naturally, a creditor or a debt collector will not agree to you paying less than initially intended if they think you can actually pay the full amount. Only when your credit score has gone down the drain, behind on payments and your income is not going to cover your debt obligations, does debt settlement come into play. Companies in charge of facilitating these services negotiate with your creditors to try and reduce what you owe. Not all types of debt can be negotiated, however. For instance, a house that can be foreclosed on, or a car that can be repossessed or student loans are the types of debt that do not fall under these categories.

2.    Associated risks

Debt settlement companies can make bold statements. A 50% debt write-off and a debt-free life or business within two years. But it is not as easy or clear-cut as that. There are many factors to consider. The most important ones are the risks associated with debt settlements. First one we are going to cover is the hit our credit would take. Our accounts will surely take a hit because we will be diverting debt payments toward the settlement account. Irregular account and debt that has been charged off by creditors will stay on our credit reports for several years. We are also very likely to be charged with additional expenses in the shape of penalty fees and interest. These expenses we need to factor into our balance. No matter the promises made by these companies, there is never absolute certainty that the outcome will be favourable to us. Some creditors outright refuse to negotiate with settlement companies. By law, these companies cannot charge us upfront for their services. This means that they charge a percentage of each debt they settle. This charge will be waiting for us later when the dust settles. Beside fees paid to settle a debt, we can face various other fees like monthly fees for program account maintenance. These are just some of the considerations that might not be initially apparent. For further information on the risks involved, it is highly recommendable that you contact legal professionals like the Dean-Willcocks Advisory for example. Law can get finicky and it is best to leave it in the hands of professionals.

3.    The pros and cons

Let’s list all the pros and cons in order to weight if debt settlement is the right choice of action. First, the pros. Settling a debt in this manner can lower our debt amount, help us avoid bankruptcy and get creditors and collectors to give us a little bit more room to breathe financially speaking. And now for the cons. Creditors might not be willing to negotiate at all, as we have touched upon earlier. We can end up with more debt than we started with. By stopping with our regular payments, we can end up racking up late fees and interest. I a settlement is not reached; we have ended up in an even deeper hole. Our credit will suffer for years to come which will reflect very poorly on any future loans we might need. Interest will rise and so will required down payments in order to even be considered. These are just some of the most basic pros and cons to consider. Depending on your unique situation, there might be a plethora of different aspects to consider and incorporate into an equation.

4.    Alternatives

As for the alternatives, we can always consider negotiating our own settlement. Though not advisable, we can offer an amount that we can instantly pay and move on from there. A transfer balance is when we move debt from one credit card to another. Depending on the conditions it could be a valid option. Finally, non-profit credit counselling exists and we can seek their help. These usually do not negotiate reductions in debt but do create new payment plans to eliminate late fees and added interest.

Whey in all the factors and create the best strategy with or without external help. A constructive solution can always be achieved with enough knowledge and planning.

Guest author, Lucas, is a business consultant with a passion for writing. Doing his research, exploring and writing are his favorite things to do.  Besides that, he loves playing his guitar, hiking, and traveling.