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How To Talk Your Way Out Of Debt

woman looking at her credit cardDid you know that you could talk yourself out of debt?

Yes, really you could talk your way out of debt.

The solution is called debt negotiation, debt settlement or debt arbitration. But whichever you call it, it’s basically the same thing. It’s where you contact your creditors and talk them into helping you get out of debt.

Sound too good to be true?

Does this sound just too good to be true – that you could just talk your creditors into helping you? Well, it is true but only under certain circumstances. For one thing it’s not worth trying unless you owe a good amount of money. And second, you should already be behind in your payments.

How it works

For the sake of an example let’s say you owe $5000 on a credit card and you haven’t been able to make a payment for the last three months. Before you contact the credit card provider you need to have a goal in mind. It could be to get a reduction in your interest rate, to ask for forbearance (where you make no payments for some period of time), a temporary reduction in your payments or to settle your debt for less than you owe (debt negotiation).

The first thing you will need to do is get through to a person that has the authority to work with you. In many cases this isn’t as easy as it might sound. The first customer representative you reach probably won’t have that authority. In fact, you may have to keep making phone calls and talking with people until you finally work your way through all the various levels to get the someone who has the authority to really help you.

As a general rule it’s easier to get a concession such as a reduction in your interest rate, forbearance or a temporary pause to your monthly payments then debt settlement. Why is this? It’s because the whole idea behind debt settlement is to pay that credit card company less than what you owe – maybe much less than you owe. As you might guess, credit card companies are pretty much opposed to doing this.

If your goal is debt settlement

If your goal is to negotiate a debt settlement, you will need to be further behind in your payments than three months – probably something around six months. The reason for this is that most credit card companies are loath to talk settlement unless you’re this far behind. Plus, after six months most of them would sell off your debt to a third party such as a collection agency. This means it’s important that you contact that lender sometime between when you haven’t made a payment for five months but it hasn’t quite yet been six months.

Be honest

When you do finally reach a person that has the authority to help you be honest about your finances and explain them as clearly and comprehensively as possible. What you’re doing at this stage is building a case for settlement. You may also need to convince that person that if he or she fails to settle you will have to to file for bankruptcy. This is the old “half a loaf is better than none” deal where the credit card company understands it would be better to get a substantial chunk of what you owe than nothing at all.

What to ask for

Unfortunately there’s no hard and fast rule as to how much of your debt you should first offer to pay. If you have the necessary intestinal fortitude you might offer to pay 30% or 40% of your debt. You can just about figure that this offer will be refused. However, your customer rep will have to come back with a counter offer – after all this is called debt negotiation. Where you end up will depend largely on how good a negotiator you are and how much you owe. But if you are pretty good and if you do owe $5000, you might end up settling for 50%.

Get it in writing

Assuming that you are successful in talking your way into a settlement make sure you get it in writing. Also be prepared to pay for the settlement almost immediately. In fact, this can be one of your best bargaining chips – “settle with me today and I’ll send you the money by cashier’s check or wire transfer tomorrow.” Of course, this does mean you will need to have the necessary cash on hand. The Catch-22 here is that if you did have $5000 on hand you might not have to ask for any concessions let alone debt settlement. So where would the money come from? If you are fortunate you might be able to borrow it from a relative. Barring that you will need to get creative. For example, if you have a 401(k) or IRA you might be able to borrow the money from it. The best thing about this is that you will have to pay the money back with interest but you will be paying interest to yourself. And you will need to repay it within six months or it will be treated by the IRS as ordinary income and you will be taxed accordingly.

What can you do if you don’t have either a rich relation, a 401(k) or an IRA? You could get a second job and use the extra income to pay off your settlement. Our economy has rebounded to the point where there are a number of part-time jobs available. For example, we recently saw that both our local Best Buy and Staples stores were looking for help. While these jobs generally don’t pay more than $10 an hour you should be able to easily net $600 a month or more.

Does this sound just awful?

Make no mistake about it; DIY debt negotiation takes time, patience and steel nerves – as well as the cash to pay off any settlements you negotiate. Plus, it will seriously ding your credit score. This is why debt settlement should be low on your list of ways to deal with your debt.

Bankruptcy is worse

The one thing that can be said without argument about debt settlement is that it’s better than filing for bankruptcy. Yes, a chapter 7 bankruptcy would get rid of all or almost all of your unsecured debts such as medical debts, credit card debts and personal loans. But it comes at a very serious cost. For one thing, a bankruptcy will stay in your credit reports for either seven or 10 years and in your personal record forever. You could be turned down for a really great job 10 years from now because the prospective employer won’t hire anyone that has had a bankruptcy. It will probably be two to three years after your bankruptcy before you can get any new credit and when you do it will come with a very stiff interest rate.

couple with debt management consultantA better option

This means that for many people a better option is credit counseling. There’s undoubtedly a nonprofit credit-counseling agency near you that either provides its services free or at very low cost. When you go to one of these agencies you will be assigned a debt counselor that will review all of your finances and help you develop a budget or plan for getting out of debt. He or she will probably also work with your creditors to get your interest rates or even your monthly payments reduced. If you’re really stuck in a black hole of debt your counselor will probably offer you what’s called a debt management plan or DMP. This is where you send the agency one payment a month and it then distributes the money to your various creditors. The benefit of this is probably fairly obvious – that you get all of those creditors off your back and would make just one payment a month versus the multiple payments you’re probably now making. However, like many things in life there are downsides to a DMP. For one thing, it will probably take you as many as five years to complete it. And second, all of your accounts will be closed and you will be required to give up your credit cards. Sadly enough a large percentage of people who sign up for DMPs never complete them and these are probably the reasons why.

What Happens If You Just Ignore A Debt Collector?

man shouting at phoneIf you’ve ever had a debt turned over to a collector you already know how bad things can get. We’ve heard stories of people who were hounded multiple times a day – both at home and at work – had their relatives contacted and were dragged into court. Unscrupulous debt collectors can and will make a debtor’s life miserable until he or she finally gives in and pays up.

The dirty, little secrets of debt collection

Why will most debt collectors stop at nothing until they get your money? The first dirty little secret of debt collection is that most collectors are paid on commission. If they spend several hours hollering at you, threatening and harassing you without colleting anything they’ve basically worked free. What this means for the collector is that the bigger the bill the better. In many cases the agency will get a bounty of 10% to 50%, which is usually split with the collector. Top collectors can earn as much as $10,000 a month.
The second dirty, little secret of debt collection is that agencies generally buy debts for pennies on the dollar. In other words, the collection agency might have purchased your $1,000 debt for $20 or less. This gives the collector room to negotiate and still earn his or her commission. This means that in many cases, you could probably settle that $1000 debt for $500 or less.

You  can run but you can’t hide

Today’s technology has had two impacts on debt collection – one good, one not so good. First, if you have any kind of caller ID you can check your incoming calls and if it appears to be from a debt collector, just ignore it. That’s the good part. The bad part is that it’s almost impossible to run away from a debt collector – even by changing your phone number.

In the event you have a debt you feel you just can’t pay, you could stonewall the collector by ignoring all of his calls. Legally speaking, you do have the right to ignore a debt collector but it’s important to understand that this doesn’t make the debt go away.

A number of different scenarios

If you decide to ignore a debt collector, there are several different scenarios that can occur. First, the collector could just leave you alone. Maybe he simply can’t find you and has quit trying to track you down. While this could happen, it’s not something to count on.

Your credit will suffer

When you have a debt go to collection, your credit score will be seriously damaged. It will appear on your credit reports regardless of whether you try to work with the debt collector or not. However, if you do talk with the collector, you at least have the opportunity to explain what the problem is and to try to work something out.

The debt could grow

Just because you don’t pay on a debt doesn’t mean that the interest will go away. Depending on the contract that the collector has with the creditor and your state’s law, the agency may be able to add interest and collection costs to your debt. Some debtors have reported that their debt actually doubled over time.

You may be bounced from one agency to another

Just as lenders sell debts to collection agencies, the agencies sell debts to one another. If the first collector that contacts you is unsuccessful at collecting the debt, it could wind up at a different agency. And this could happen multiple until you give up and pay the debt.

People you know may be contacted

In the event that the debt collector tries to reach you and is unsuccessful, the law allows him to reach out to third parties such as your neighbors, relatives or your employer – but only to find you. The law doesn’t allow a collector to disclose the fact that you owe a debt or to discuss your finances with other people. However, it can still be very embarrassing if the person the collector called starts asking you pointed questions like, “why did this collection agency contact me?”

You could be sued

If you fail to communicate with a debt collector it may leave the agency with no option but to sue you. While it is possible to successfully defend a debt collection lawsuit, it’s very difficult. And if the agency is successful in court, it can get a judgment entered against you. This in turn would allow the collection agency to garnish your wages or even go after your bank account.

The stress will increase

Trying to dodge a debt collector can leave you feeling very stressed out. It can be scary or frustrating to talk with a debt collector but the alternative – which is not to talk to him – can be just as stressful. If you call the debt collector, this is the friendliest aspect of debt collection because at that point he will want to work with you to try to resolve the debt. The bottom line is that if you have an unresolved collection account, try to decide on your approach and then pick up the phone – or write a letter – so you can put the debt behind you. Also, because collection accounts have such a dramatic impact on your credit score, it’s a good idea to get your free annual credit report to see whether or not you have any outstanding collection accounts. You should also be sure to monitor your credit scores every month.

Tips for negotiating with creditors

If you take a call from a debt collector, he or she will have no interest in why it is that you can’t pay the bill. But if you’re in a hardship situation, the collector does need to know this and what it is you’re doing to get back on track. You should have a story ready and then stick to it. This could be just a few sentences that you can use consistently when you talk to a creditor. For example, “I was very ill, out of work for two months and now I am trying to get caught up.” Or “my husband was laid off and I’ve taken a significant cut in pay. He’s looking for a job so we can catch up but we don’t have any money right now.”

Don’t be a drama queen

You’ll get nowhere with a debt collector if you lose your temper. It’s important to stay calm and not lose your cool. If you find yourself losing your temper, just tell the collector you will need to talk with him later and then hang up. In the event that you have to talk with that collector again, tell him you would like to record the conversation. This usually keeps collectors on their best behavior.

Ask the right questions

If the collector threatens to sue you or that you’ll lose some property if you don’t pay up, ask for specifics: “When will I be notified of the lawsuit?” Or “When will the money be taken from my bank account?” Some of these threats may be a illegal and the more information you have the better.

Be sure to take notes

Whenever you talk with a collector, have a pen and paper handy so that you can take notes. Be sure to write down the name of the person you talk with, what was discussed and when you talked. This will not only take much of the emotion out of the deal but you will also have a record if the collector broke the law when attempting to collect from you.

Know exactly what you can afford to pay

Sit down with a notepad or spreadsheet and go over your expenses and income very carefully. Figure out exactly what you could afford to pay and agree to pay only a realistic amount. In general, if you can come up with a lump sum amount to resolve the debt, you’ll get the best settlement. If you can’t do that, you may have to agree to a payment plan. In this case, you’ll probably pay more over time. If you do agree to a payment plan, make sure you know the total amount you will be required to pay.

Deal with creditors and not collectors

What’s best is to try to work out an agreement with your creditor or creditors before your bill(s) is sent to collection. If you make late payments this will affect your credit score and credit reports, but collection accounts will do even greater damage. You should know that it’s a myth that so long as you are paying something towards a debt it can’t be turned over to a collection agency. Also, understand that once a debt is sent to collection, you have no choice but to deal with the collection agency.

Get it all in writing

If you do agree to a payment arrangement or settlement agreement, get everything in writing before you pay a cent. If not, the terms can change and it will be your word against that of the collection agency. There have been many cases where consumers were hounded for balances they thought they had resolved years before.

Finally, here is a video courtesy of National Debt Relief with some good tips for dealing with debt collectors.

10 Things It’s Important To Know Before Choosing Debt Settlement

woman looking at documentsIf you’re seriously in debt and by that we mean you owe $10,000, $15,000 or more, you’re probably lying awake at night wondering how in the world you’re ever going to get out from under that burden. Fortunately, you have several alternatives such as a debt consolidation loan, consumer credit counseling, debt settlement or filing for bankruptcy. While you might be familiar with debt consolidation loans or even consumer credit counseling, you might not exactly understand what debt settlement is and whether or not it would offer you a good way out of that debt burden. If this is the case, here are things you need to know about debt settlement.

1. What exactly is debt settlement?

Debt settlement is sometimes called debt negotiation or debt arbitration. It’s where your lenders accept less money than you actually owe but agree to treat the debt as paid in full.

2. How a debt settlement program works

The way a debt settlement program works is that when you sign up, you make monthly payments to the debt settlement company, which is deposited into a trust account. You are then not required to make any more payments to your creditors. Only you can manage your trust account and you do this through a secure login. When you have deposited enough money into your account, the debt settlement company will begin negotiations with your creditors.

In these negotiations, the debt settlement company will work with your creditors or collection agencies to settle your debts for sums that are acceptable to both you and your creditors. Once the settlement company has settled on an amount with your creditors, you then pay off the settlement either in installments or as a lump sum. Debt settlement usually means a substantial reduction in the amount of your outstanding debt. However, how much of a reduction that you get will depend mostly on how good the debt settlement company is.

Here’s a short video that explains a bit more about debt settlement and how much of a reduction you could expect based on the type of your debt.

3. When it makes sense to choose debt settlement

  • There are certain circumstances where debt settlement makes sense. They are:
  • You can’t pay your bills
  • You have unsecured debts
  • You could repay if your debts are reduced
  • You’re thinking of declaring bankruptcy
  • You’re five to six months behind in your payments

4. Debt settlement is legal

There is nothing at all that’s illegal about debt settlement. In fact, it is one of the most popular options for paying off debts. Unfortunately, there are swindlers that have made money off people struggling with debt. Fortunately many of them have been shut down because of their failure to comply with state and federal laws.

5. Why lenders accept debt settlement offers

If a lender accepts a debt settlement offer it is forgiving a part of your debt. This means it’s losing money on the deal. So why would a lender agree to work out a debt settlement? It’s because they are smart people. They understand that when your finances are in very bad condition, you could decide to file for bankruptcy. In this case, your creditors would recover very little if any money from you. This makes debt settlement a better deal for them because they will get back at least a significant part of what you owe.

6. The biggest pros and cons of debt settlement

The biggest pro of debt settlement is that you will have your debts reduced and you will no longer have to put up with debt collectors. In addition, debt settlement can help you avoid the hazards of bankruptcy, which can be severe. As an example of this, if you were to file for a chapter 7 bankruptcy, your credit score would probably drop by 180 to 200 points, you will have a tough time getting any new credit for two to three years and the bankruptcy will stay in your credit report for 10 years.

The biggest con to debt settlement is that your credit score may drop although it won’t be as severe as if you had filed for bankruptcy. The reason for this is that any time you don’t pay back the full amount of the debt, your lenders will report the account as “paid as agreed” or “paid as settled” to the credit reporting bureaus. And this will stay in your credit report for seven years. However, if you’re already having a serious problem with debt, this might not be that big a negative.

7. How long  debt settlement usually takes

How long it would take you or a debt settlement company to settle your debts will depend on how many debts you have, the type of debts and the amount of money you would have to pay for your settlements. In general, debt settlement programs require two to three years. However, the more you owe, the longer it will take. For example, if you owe $10,000 or more, it might take you two to four years to complete your program.

8. How to know you would be eligible for debt settlement

Debt settlement isn’t for everyone and although it can be beneficial, not everyone will qualify. However, it is likely that your lenders will agree to settle your debts if you have defaulted on a loan, are continuously missing payments and have some source of income. You would also likely be able to have your debt settled if you have a very large amount of debt and are facing a financial hardship.

9. Why choosing a debt settlement company could be better than doing it yourself

You might be able to do debt settlement yourself, depending on what kind of person you are. You need to be patient, a good negotiator and able to understand complicated legal documents. Plus, you must have the cash available to pay for any settlements you are able to negotiate because that’s one of your chief bargaining tools – that if the lender will settle with you for less than you owe, you will send immediate payment. If you don’t have the requisite cash on hand to pay for your settlements or if you don’t feel that you would be good at negotiating with lenders, your best option would be to turn your debts over to a professional debt settlement company.

10. How to select  good debt settlement company

There are numerous debt settlement companies available via the Internet but as noted previously, some of them are swindlers. Here are some tips that could help you select a good and ethical one.

  • Does the company require you to pay an upfront fee? It is actually illegal for debt settlement companies to charge upfront fees but some will try. Avoid them at all costs.
  • How much does the debt settlement company charge? Ethical debt settlement companies will tell you upfront how much they charge for their services. If fact the good ones won’t charge you anything until they have settled your debts to your satisfaction and presented you with a payment plan that you approve.
  • Read reviews. There are reviews available of all the top debt settlement companies. Check them out to make sure that most of the reviews are positive. Some of them will be negative as that’s just the nature of the business – it’s impossible to make everyone happy when it comes to money and debt.
  • Check with the Better Business Bureau. The top debt settlement companies will be members of the Better Business Bureau and will have a rating of at least an A.
  • Make sure it’s licensed in your state. Not all debt settlement companies are licensed in every state. Be sure to check to make sure the company you’re thinking of using is licensed in your state.
  • Be certain to understand your contract. Your contract with a debt settlement company should be clear and easy to understand. If the one you’re offered is complex, complicated and difficult to understand you should either take it to a friend or an attorney for help or find another company.

Can You Really Trust A Debt Settlement Company?

question markIf you’ve searched the Internet on the terms “debt settlement” or “debt relief,” you undoubtedly got page after page of results – or companies that claim they could settle your debts for thousands of dollars less than you really owe. Since this comes under the category of “if it seems too good to be true,” this raises the question of can you really trust those companies.

How debt settlement works

If you’re not familiar with debt settlement, here’s how it works. First, you need to be nearly six months behind in payments to your creditors. When this is the case, the debt settlement company then has leverage to settle your debts for less than you owe. This is because lenders typically sell off debts they have been unable to collect after 180 days and they usually sell them for only pennies on the dollar. So when a debt settlement company contacts a lender and offers to immediately pay off the debt for, say, 40% or 50% of what’s owed, most lenders will agree as this represents a much better deal than selling off your debts to a collection agency.

You will be presented with a payment plan

When the debt settlement company is able to settle all of your debts, it will present you with a payment plan. Depending on how much you were in debt, it could require two, three or four years before you became debt free. If you sign off on the plan, you will then pay the debt settlement company and not your creditors. Your debts will have been consolidated and you would have only one payment a month to remember.

The benefits of debt settlement

Of course, the major benefit of debt settlement is what you’ve already read – that you should see your debts slashed by 40% or 50%. But there are benefits in addition to this. For one thing, when you contract with a debt settlement company you will no longer be harassed by any of your creditors because you will not be required to deal with them directly. Second, you will get your debts paid off in less time. Third, you should be able to choose which accounts you want to have closed and which you want to stay open. And fourth, you avoid the stigma of having to file for bankruptcy, which would mark you as a bad money manager.

The disadvantages of debt settlement

While debt settlement will not leave a stain on your credit reports as much as would a bankruptcy, it will effect your credit score. As we reported in an earlier paragraph, you have to be nearly six months in arrears on payments to your creditors for debt settlement to be a viable option. And any time you miss six months of payments, this is bound to have a negative effect on your credit score. Many experts believe that this would cost you about 80 points versus a bankruptcy, which could drop your credit score by as many as 200 points.

The scam artists

If you are so seriously in debt that you’re actually thinking about filing for bankruptcy, debt settlement could be an excellent option. But it’s important to choose a company you can trust. Unfortunately, some debt settlement companies are scams. They will ask for money up front, promise to settle your debts for pennies on the dollar and then never pay any of your creditors. It could be two, three or even more months before you discover you’ve been scammed and by then it’s too late to get any of your money back. Plus, you will probably have piled up a lot of new debt in the form of interest charges and fees during those months you thought the debt settlement company was paying your creditors – and they weren’t.

Here’s a video with more information about these scam artists and how to avoid them.


Who can you trust?

There are honest and ethical debt settlement companies. They are the ones who don’t charge any upfront fees and cost you nothing until you approve your payment plan. You can also trust a debt settlement company if it’s been in business for five or 10 years. The con artists generally open up under one name, scam as many people as they can, close down and then open up a few months later under a new name. Legitimate debt settlement companies are accredited by the Better Business Bureau and belong to organizations such as the US Chamber of Commerce and the Association of Fair Credit Counselors. These companies will also have a lot more positive online reviews than negative ones. In comparison, the scam artists usually have nothing but negative reviews.

Helpful debt counselorsYoung Man talking on the phone and smiling

An honest debt settlement company will have helpful debt counselors who will discuss your situation at length and offer valuable advice. The advisor you’re assigned will be friendly and knowledgeable and able to answer all of your questions. He or she will not pressure you to do anything.

Everything in writing

Another mark of an honest and ethical debt settlement company is that it will provide all of its information to you in writing. In comparison, a scam company generally won’t. It will rely on a lot of fast talk and verbal promises – that it will never keep.

A legitimate debt settlement company will provide you with a written contract to review and sign that will spell out the exact details of what the company will do and what you will be required to do. Naturally, you should very carefully review any contract you’re offered. If there’s anything about it you don’t understand, either ask a friend for help or pay an attorney to review it. Once you sign a contract with a debt settlement company you will be obligated to follow its provisions so it’s critical that you understand them.

10 Important Questions To Ask In Debt Settlement

question markDebt settlement is a great way to get out of your credit problems. There are many benefits to a debt settlement plan but it is not always true for everyone. If you do not qualify for it, this will not work too well for you. With any debt relief program, you have to qualify for it first. That is the only way that you can enjoy the full benefits of your chosen debt solution.

The main appeal of settling your debts is because of the debt reduction that this program promises. You will basically negotiate with your creditor to allow you to pay only a portion of what you owe. However, it has some serious credit implications. To make your creditor agree to reduce your debts, you have to intentionally default on your payments. That is the best way to prove that you are in a financial crisis.

To help you decide if the cons are worth it because of the pros, here are 10 questions that you need to ask yourself.

5 questions before deciding to settle your debts

When you are still deciding if you want to use debt settlement, here are 5 questions to ask yourself first.

What type of debts do you have?

This type of debt solution can only work for certain type of debts. If you have mostly secured loans, then debt settlement will not be able to do much for you. Once you start defaulting on your payments, the creditor will simply seize the collateral that is on the line in your loan. You can only enroll the following debts in this program: credit card debt, personal loans, medical bills, utility bills and other unsecured loans.

Are you in a real financial crisis?

Some people just want to escape the responsibility of paying off what they owe. Unless you are in a real financial crisis, you should not go for debt settlement. If your creditors find out that you have all the capabilities to pay your dues, they will not agree to settle with. You will not get the debt reduction that you wanted.

Do you need a good credit score?

One of the disadvantages of debt settlement is its effect on your credit score. If you have future financial plans that will require a loan, you need to keep your credit report from getting any blemish. The payment defaults that you will be required to do before settling your debts will seriously ruin your score. Not only that, the late payment penalties will add to your debt amount – which will bring your score even lower.

Is bankruptcy the only other option?

Despite all your answers to the questions we discussed, it is important to realize one thing: is bankruptcy your only other option apart from debt settlement? If it is, you should just accept all the disadvantages and use this program to avoid bankruptcy. The negative effects of being bankrupt is much much worse.

Is there no other way to increase your disposable income?

Some people will work hard to grow their income so they can opt for other debt relief programs. That is one way that they can avoid the effects of debt settlement and bankruptcy. However, there are instances wherein getting more money is not possible. If this is your case, then you may be better off with choosing debt settlement.

5 more questions to ask if you think settling debts is the right solution

Once you have decided that debt settlement is the right option for you, there are still 5 more questions that you have to ask yourself. Knowing the answers will help you solidify the benefits that you will get from this debt relief program.

Do you need professional help?

Debt settlement is one of the options that you can do on your own or with a professional. If you think that you can be easily intimidated and you cannot negotiate with your creditors, then looking for a debt settlement company will be the better choice. But if you want to save on the service fee, make sure that you study what you have to do.

Have you done your research?

With all type of debt relief programs, you must do your research to understand what you need to do. This is true even for those who decided to get professional help. Among the things that you need to research on includes the laws on the TSR (Telemarketing Sales Rule) or FDCPA (Fair Debt Collection Practices Act). You can find out more about them through the Federal Trade Commission (FTC) website.

Do you know how to negotiate?

In case you have decided to do your own debt settlement, you have to know how to negotiate. Understand the FDCPA to know what the creditor/collector is allowed to do. Some of them will threaten you with lies just to get you to pay your dues. If you are not careful, you may be tricked into paying more than what you need to. You should not be easily intimidated and you should not how to lay your cards on the table at the right moment.

Can you handle debt collection calls?

Remember the requirement with debt settlement that you need to default on your payments intentionally? That will bombard you with collection calls that can add to the debt stress that you are already feeling. Try not to be too emotional about it and keep your cool. If you know the FDCPA, you will know when they are bluffing or not.

Where will you get the settlement fund?

If you really want to be free from debt immediately, you may want to be ready with the settlement fund that you will offer your creditors. If not, you have to make everyone wait until you have saved up enough money for the lump sum payment that you will make.

Consider the answers to these questions carefully before you really finalize your decision to use debt settlement. While it can effectively get you out of debt, take note of the repercussions that its process will bring your financial situation.

How To Aim For Debt Settlement To Avoid Bankruptcy

US Bankruptcy CourtWhile there are some cases wherein bankruptcy is the only option, you have to realize that you need to exhaust all possible alternatives first. It is never a good idea to just plunge headlong into this debt solution – no matter how fast it gets you out of debt. You should realize that the repercussions and damages is too great to ignore. If you can make further sacrifices in order to afford one of the other debt relief options, that is something that you may have to face.

Even if bankruptcy can discharge your debts, that does not mean you will not spend anything. There are several costs to consider like the processing fee involved in filing your petition. Not only that, you have to pay for the professional fee of the lawyer who will help you out. If anything, the cost should be one more reason for you to avoid bankruptcy.

Why debt settlement is better than bankruptcy

Because of the many disadvantages and pitfalls of bankruptcy, you may want to consider the next best thing – debt settlement.

A consumer has two options when it comes to bankruptcy – Chapter 7 and Chapter 13. The first is the better option because most of your debts will be discharged – at least whatever is not paid after the liquidation of your assets. The latter, on the other hand, will subject you through a court-ordered repayment plan that will take months to a couple of years to complete. While Chapter 13 can protect your assets, you will still be paying a portion of your credit obligations. If that is the case, then you may want to just avoid bankruptcy and opt for debt settlement.

If you compare debt settlement with bankruptcy, you will realize that there are some advantages to be gained with the former. Here are some of the reasons why debt settlement should be chosen over bankruptcy.

  • Lesser damage on your credit score. One of the main reasons why you need to choose debt settlement is for the damages that bankruptcy can bring to your credit report. The effects of bankruptcy can be as high as a 200 point reduction on your current credit score. In debt settlement, the average reduction is only 50 points – which is not so difficult to regain once you get yourself out of debt.

  • Your financial difficulty will remain to be a private thing. Another reason why you want your debts to be solved by debt settlement is the fact that your problem will remain to be a private issue. Everyone who filed for bankruptcy will be placed in a public record. If you want to avoid bankruptcy and this embarrassment, just opt for settling your debts.

  • Protection of your personal assets. Another reason why you need to stick to debt settlement is the fact that you can protect your possessions from being liquidated. If you have some properties that you don’t mind selling, you can do that but it will be under your own terms – not the court.

How to stretch your finances to afford debt settlement

To be sure that you are doing the right thing, you may want to consider going through credit counseling to determine if your finances can really afford debt settlement. Anyway, bankruptcy will require you to go through this so it may be best to get a head start. You are not losing anything and you get professional confirmation as to whether you should avoid bankruptcy or not. You can look through the list of accredited credit counseling agencies on the US Department of Justice website to find the company that you can trust.

One of the reasons why a counselor will tell you to file for bankruptcy is when your finances cannot afford it. Most people, because of the possibility of a Chapter 7 bankruptcy believe that this is the more economical choice for the to get out of debt. While there may be some truth to that, you have to realize that there are ways for you to make debt settlement cheaper. For one, you can forego hiring a debt negotiator and just conduct your own settlement proceedings. That could save you some money.

Here are other tips to help you grow your finances and thus afford debt settlement.

  • Cut back on spending. You need to analyze carefully your monthly expenses so you can see where you can cut back on what you usually spend on. While this can grow your debt payment fund, it will be fairly limited but a small amount is better than nothing.

  • Earn more money. Of course, there is also the option to earn more money. You can opt to get a second job or build up an online career to help you get out of debt. That should help you get your hands on more money to help with debt payments.

  • Stop incurring debt. It is also a good idea to stop acquiring more debts. This will take a lot of your effort and self control but if you are successful, you can find yourself loving the debt free life.

  • Grow your savings. Lastly, try to grow your savings. This is very important because it will help you finance an emergency situation and thus keep you from the need to borrow money. You can simply use your savings to get out of your unexpected expense.

Here is a video that will help you decide if you should file for bankruptcy and the negative effects that it has on your financial future.

What Is The Best Alternative To Debt Consolidation Loan?

man carrying debtUsing debt consolidation loan as a debt solution is the first option that consumers usually think of when they are faced with mounting credit obligations. In truth, this is an effective option but only if you have the right qualifications and attitude towards it.

Some financial experts doubt the effectiveness of using one debt to pay for another. It is not really viewed as a solution because you are merely shifting your dues so your payments will not be as difficult as before. Instead of dealing with multiple creditors, you apply for a loan that is big enough to pay for all your other debts. That way, you will be left with only one lender and debt to pay for month on month.

However, there are a couple of things that you have to consider before you choose this as your debt solution. First of all, you must possess either a good credit score or a collateral to avail of a low interest loan. This will ensure that your monthly payments will be smaller than your current. But if you do not have both, you may want to consider other debt relief programs that can give you better results based on the qualifications that you have.

Instead of consolidating with loans, use Debt Management

If you think that your qualifications are ill-suited for debt consolidation loan, you may want to consider debt management instead. The latter is another type of consolidating debts but this time, no loan is required to make it possible. Instead of a loan helping you to combine what you owe, a credit counselor will be used instead. Here are important points that you need to know about debt management.

  • The program begins with credit counseling wherein the credit counselor will analyze your finances and debts to see how you can best solve it.

  • Once the data is analyzed, the credit counselor will discuss with you the different options that you have in terms of debt relief.

  • If you qualify for debt management, the counselor will discuss the process and the fees that you will go through.

  • When you agree to use debt management, you will create a debt management plan or DMP that will contain your suggested low monthly payment scheme. The low payment will be possible because the counselor will lengthen your payment period.

  • The counselor will give the DMP to creditors to approval and will negotiate on your behalf for the lowering of your interest rate. If they agree, that will mean more of the monthly payments will be used to pay off the principal debt.

  • Once approved, you will send the total monthly payment to the counselor who will take care of disbursing the payments to your different creditors.

The benefit of this is you don’t need to have a good credit score or a collateral. However, the lower interest is not really guaranteed – but the counselor will put their best effort to provide this.

Of course, the lynchpin here is to find a trustworthy and reliable credit counseling agency that will help you out. To find them, you may want to start your search by going to the membership list of the National Foundation for Credit Counseling or the NFCC. Reputable organizations such as this will help link you to legitimate counseling agencies that can assist you in getting out of your credit problems.

Another important reminder is you should have a steady income. There is no debt reduction here and if you cannot afford the payment, debt management will not work for you.

When making a loan to pay for debt is not enough

In case you need a debt reduction because your income is not enough, the best alternative for debt consolidation loan is debt settlement. There are several benefits to a debt settlement plan. When you decide to use this as a debt relief option, here are the things that you should know about it.

  • Debt settlement works best for unsecured debt like credit card debt, medical bills and other personal loans.

  • Debt settlement will require you to default on your payments intentionally to help convince the creditor that you are in a financial crisis.

  • The default on monthly payments will lower your credit score but will allow you to save up for a settlement fund.

  • The settlement fund will be used to negotiate with creditors. You will ask them for a debt reduction by offering an amount that is lower than what you owe. You will tell them that you can only afford to pay this amount and if they cannot accept, you will be forced to petition for bankruptcy.

  • During the negotiation, you will start with an amount that is lower than what you have on your settlement fund. This will give you room to negotiate.

  • Once you and the creditor agree on a settlement amount, make sure you hold a document that states the forgiveness of the debt balance once you have paid the agreed amount.

This program is quite stressful but you have the option to hire a debt professional to help you out. Just like with a credit counseling agency, you may want to start your search by looking at trustworthy debt settlement companies through a reputable organization. One of them is the AFCC or the American Fair Credit Council. Look at the members to see who among the companies on the list you can work with.

If you want to know more about how you can do your own debt settlement, here is a video that we have created for you. Watch it to know how you can be successful in settling your own debts.

What To Do After Debt Settlement

woman experiencing freedomDebt settlement is effective. Those who have gone through the program and was able to successfully negotiate a debt reduction can attest to this. While it cannot be denied that there are many risks to this program, the fact that people have achieved debt freedom from it, proves that it can solve your debt problems.

This debt relief program aims to give consumers a debt reduction. To do that, you have to convince your creditor or the collector handling your account that you are in a financial crisis. And to make them believe it, you have to start defaulting on your payments. You will negotiate with them to allow you to pay only a portion of your debts. Once you agree on an amount that is often times lower than your current, you will pay that off and whatever is left of your debt will be forgiven by the creditor/collector.

But once you have achieved your debt freedom, there are still some things that you need to do. Settling your credit card debt is not the end of the journey.

It is just the same as dieting. When you have achieved your ideal weight, you don’t stop there. You change some things in your life permanently to help you avoid gaining what you lost. The same is true after you get your freedom from debt. There are a couple of tasks that needs to be accomplished to solidify your current financial situation.

How to clean up the pieces after settling your debts

So what are the things that you have to do? Well most of the things that you will do at first involves cleaning up the pieces of your financial life.

  • Keep the signed settlement document. This is your proof that after you have paid off the agreed settlement amount, you will no longer be pursued for this type of debts. You have to know that there are some collection agencies who buy old debts and come after the debtor – even when the debt is paid. If that happens to you, this is the document that you will show them.

  • Get a copy of your credit report. A few weeks after your payment is cleared, get a copy of your credit report and see if your file had been updated. You can get a free copy from the Annual Credit Report website. Check if the debt is still reflected there. If yes, then you can call your creditor/collector and remind them to file the update already.

  • Start increasing your credit score. There are many ways to fix your credit score and that begins by using your credit card now and then and paying off the purchase immediately. If you send the payment within the grace period, you don’t have to worry about any interest.

  • Reassess and revise your budget plan. Now that you have your debt out of the way, you can revise your budget plan to remove it from your expense list. It is highly advised that whatever you have saved from the debt payments be transferred to your savings account.

These are the tasks that you need to accomplish immediately after you have paid off your debt (except for the credit report). By doing so, you can arrange your life in such a way that will suit your new found debt freedom.

Tips to live a debt free life after debt settlement

But even as a person who lost weight continues watching what they eat, there are still some things that you have to continue doing so you can stay debt free. Just as you can gain weight almost immediately, you can also put yourself in debt easily if you are not careful.

Just think about what debt free people do with their lives. They display certain traits and apply practices that ensure they will not be put in a debt situation. If you want to be like them, here are the things that you must do.

  • Live within your means. Debt signifies that you had been spending more than what you actually make and that is one change that you have to implement. Stop overspending and just keep to the limits of your income. If you cannot afford to buy something, do not buy it.

  • Analyze every purchase. Smart spending is a must to keep to a debt free life. Here’s the thing, even if you can afford it, it doesn’t mean you should have it. Like that luxury car that you want to buy. Even if it looks good and you know that you can afford the monthly payment on a car loan, it doesn’t mean it should be bought. Think about the gas consumption and the money wasted on the interest of the loan. Even if you can pay for the car in cash, you still need to think whether it is the right thing to do.

  • Save for the rainy day. Another important habit that you need to develop is saving. This is one of those that will also keep you from incurring debt ever again. You can make the right choices and live within your means but if you do not have enough money for emergencies, you can end up in debt as well.

  • Grow your money. After all of this, you may want to think about growing your income. Remember that the cost of living continues to rise and you need to make a way to have your income grow too. You can invest some of your savings or you can find another source of income.

Debt freedom does not really mean you have to sit back and relax. You will not be as stressed as before but you still need to keep a close eye on your expenses to make sure that you will never land in the same position again. That is the smart way to do it after you have gone through the damaging effects of debt settlement.

Watch Out For Those Debt Settlement Scams

frustrated woman with credit card debtWouldn’t you like to get your monthly credit card and loan payments reduced – guaranteed? Or if you’re carrying a heavy load of debt, wouldn’t you like to see it go away – again guaranteed? If you were to search Google on the term “debt relief,” you will find literally page after page of companies promising that they can do these kind of things.

Scam artists

Unfortunately, some of these companies are scams. They are run by con artists who make promises on which they can’t deliver. If you make the mistake of falling for one of these pitches, it could end up costing you hundreds of dollars in fees. You could be in worse financial shape than before. You would owe just as much as before, plus you might have additional penalties and late fees to pay.

The FTC has done its best

The FTC (Federal Three Commission) has investigated these companies and sued more than a dozen of them in the last few years. These scam outfits can be like whack-a-mole. The FTC or IRS slaps them down under one name and they pop up a few months later under a different name.

How they mislead clients

Debt settlement con artists mislead clients not just about what they can deliver but also who they are. They may claim to be a non-profit company when they are actually for-profits. This non-profit pitch makes customers feel confident about signing up for the service but it’s just a way to prey on peoples’ trust. They may also lie about their charges. They may say there’s only a small fee involved or may not mention fees at all. But when you send them money, you might learn much to your chagrin that most of it went to the company as a “referral fee” and not to pay down your debts.

Or as this video points out, if a company’s promises seem too good to be true, they probably are.

Tips for choosing a debt settlement company

Facing a mountain of bills can be frightening. But don’t sign up with any debt settlement company until you’ve followed these tips.

• Shop around. Compare several different companies. Try to get a feel for how they operate. If your credit counselor doesn’t spend at least 20 to 30 minutes on the phone with you to get a complete picture of your finances, you’re not really getting any counseling. So you should avoid that company.
• Get it in writing. Ask any debt settlement company you’re considering a lot of questions and write down the answers. Ask that everything the company says it will do be sent to you in writing
• Ask about fees. If you talk with a debt settlement company that is vague about its fees or reluctant to talk about them, go somewhere else.
• Check out its credentials. See what associations the company belongs to. Honest debt settlement companies typically belong to the American Fair Credit Council (AFCC) and the US Chamber of Commerce. They are also accredited by the Better Business Bureau and should have a rating of at least A-.
• Read online reviews. Be sure to check out the company’s online reviews. Even the best of these companies will have some negative reviews. It’s just the nature of the business. However, if you find more negative than positive reviews, stay away from that company.

Would you even be a good candidate for debt settlement

Not everyone is a good candidate for debt settlement. For debt settlement to be a viable solution, you must owe at least $8000 in debts. If not, the fees you will be charged could outweigh the savings you would get from having your debts settled. Second, you need to be at least six months in arrears on your debt payments. The reason for this is that no lender will be willing to discuss debt settlement unless you’re this far behind.

Look out for upfront fees

If a company requests or demands that you pay money up front before it starts your debt settlement process, avoid it at all costs. No legitimate debt settlement company will do this. Instead, they will, as explained in the next paragraph, take their fee only after your debts have been settled and you have approved a payment plan.

What a legitimate debt settlement company can doHow To Be Smart With Debt Relief

No legitimate debt settlement company will promise to reduce your debts by thousands of dollars in just a few weeks. While they can get your debts reduced, this is a more time-consuming process. The way it generally works is that you start sending the company money instead of to your creditors. This money is deposited into an FDIC-insured trust account that only you can manage. While this money is building up, the debt settlement company will be negotiating with your creditors. When all of your lenders agree to the proposed settlements, the money that has accrued in your trust account will be used to pay for the settlements. However, this money will not be distributed until you approve a payment plan and allow the money to be released from your trust account.

So is debt settlement for you?

Debt settlement can be an excellent way to pay off debts but there are several caveats. First, be sure to follow the tips in this article to make sure the company you’ve chosen is honest and reputable. Second, understand that debt settlement will have an effect on your credit score as will a bankruptcy. However, it will be much less severe. Most experts believe that a bankruptcy will cut your credit score by about 200 points. In comparison, debt settlement may reduce it by only 80 points. But when all is said and done, debt settlement can be much better then continuing to labor with that mountain of debt.

Debt Relief Options For Different Financial Situations

Debt Relief Options For Different Financial SituationsThere are many debt relief options to help you get out of your current financial crisis. Of course, it all begins with you understanding what got you in this situation in the first place. This will help keep you out of debt and also allow you to achieve debt freedom a lot faster.

Once you have identified that, you may want to take a look at your finances and the type of debts that you owe. There is no shortage of debt solutions. However, you need to know the right program that will suit your problems best. There is no one formula and to maximize your limited resources, you need to base your debt relief program on how much you can afford to pay your debts.

There is a specific solution depending on your financial situation. Each of our status is unique but we usually fall under one of three categories when it comes to our debts.

Before you find the category and debt solution that suits you best, take a look at your budget first. Identify your income and expenses (excluding debts) and get the difference. Whatever is left will be the disposable income that you can allot for your debt payments.

Debt relief for people with money for minimum payments

The first financial situation is having enough disposable income to cover your minimum payments. The extreme scenario is having a little deficit on your monthly requirement – but nothing significant. If this is your financial standing, you can afford to use debt consolidation to solve your problems. The benefits of this includes the following:

  • Lower monthly payment

  • Possible lower interest rate

  • Longer payment period

  • Single payment scheme

  • Does not affect your credit score.

What you have to know, which is important too, is that this option will not give you a debt reduction. The lower monthly payment is possible because your current balance is stretched over a longer term. The lower interest rate is also responsible for this. But in terms of reducing what you owe, there will be none of that. You will still end up paying for everything that you owe. This means a steady and stable income is needed. You should also boost your savings so that you can meet your debt payments without a problem. This program takes 5 years to complete so you need to be sure that your income can keep up with such a long payment period.

There are two popular ways to consolidate your debts.

Debt consolidation loan. This option involves getting a low interest loan that you will get to help you pay for your multiple debts. Once the loan is approved, you can simply go to your creditors, pay them all completely and just concentrate on the single payment that is required from this one loan. To maximize this option, you need to make sure you will get a low interest – which means you either have a good credit score or a collateral.

Debt management. In case you do not have the ideal credit score or collateral, you can use debt management instead of getting a loan. This option allows you to work with a credit counselor who will help you come up with a debt management plan that will contain your proposed lower payment terms. The counselor will present this to the creditor. When approved, you will send a single monthly payment to the counselor who will take charge of distributing the funds to your different creditors.

With the latter, you need to be careful about your choice of company. Make sure you brush up on your knowledge of the Telemarketing Sales Rule (TSR) to help you identify the legitimate companies from the not.

Best debt solution when you cannot meet your minimum payments

In case your financial situation cannot afford to meet your minimum payments, you obviously need a debt reduction. This is when debt settlement becomes the better option for debt relief. The whole idea of this program is to convince your creditor that you are in a financial crisis. You want them to allow you to pay only a portion of your debts and have the rest forgiven. This program will give you the following benefits:

  • Eliminate collection calls (if you work with a debt negotiator).

  • Reduce your current balance significantly.

  • Get you debt free in 2-4 years.

  • Possible elimination of interest rate and other charges.

The catch here is that you need to default on your payments in order to convince your creditors that you are in a financial crisis. This would mean you have deal with a damaged credit score. Instead of paying your creditors, you will send your money in a secured account and grow it there until you and the creditor comes into an agreement.

While you can do this on your own, you will get a lot of benefits by getting a professional to work with you. The debt negotiator will bring their expertise into the whole process. You will also be left in peace because part of their service includes taking over communication calls. Just make sure that they are certified by authority training organizations like the IAPDA or International Association of Professional Debt Arbitrators.

Credit relief for people in severe financial conditions

In case your conditions are quite severe, your option is to file for bankruptcy. This means your income is barely enough to pay for your basic necessities or you have very little income coming in (or none at all). Most financial advisers will tell you to exhaust other options first before opting for this one. This will have severe effects on your credit score and that will make it even more difficult to recover after getting debt freedom. Having bankruptcy on your credit report will make it hard for you to get financial assistance for a home or a business that you want to put up.

When you file your petition, the court will assign the type of bankruptcy that you qualify for. This involves the means test. If your income is lower than the state average, you can qualify for Chapter 7 wherein your assets will be liquidated and anything that does not get paid will be discharged. If your income is above the average, you qualify for Chapter 13. This means you will be subjected to a repayment plan. This type of bankruptcy is not so different from debt settlement.

The US Courts website hold a lot of information about bankruptcy that will help you understand the whole process. It is best to gather information first so you know your options very well. That will help you make smart choices about your debt solution.

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