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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.

Do You Have What It Takes For DIY Debt Settlement?

woman drowning in debtIf you feel as if you were drowning in a sea of debt and saw a sign advertising “bankruptcies for as little as $500″ you might be very tempted to call that attorney and say “sign me up.” However, this could be a very serious mistake. A bankruptcy will stay in your credit report for up to 10 years and in your personal file for the rest of your life. Once you file for bankruptcy it will be at least two to three years before you will be able to get new credit. And when you are able to get credit it will have a very high interest rate. You may even have to pay more for your auto insurance, your utilities and your rent.

A better option

If you’re five months or more behind in your credit card and loan payments a better option might be to settle those debts yourself. This will cost you less than hiring a professional to do it for you and puts you in control of the settlement process. However, many people won’t try DIY debt settlement because they just don’t want to have to interact with banks, collection agencies and other creditors. DIY debt settlement can seem like it would be a very scary experience and you may have heard that it can be a brutal process. And it definitely isn’t for the faint of heart. DIY debt settlement requires hard work, persistence and the willingness to deal with debt collectors for months or even years.

The goal

Of course, the goal of debt settlement is to settle your debts for less than you actually owe. In fact, if you have the guts, time and negotiating skills you should be able to settle your debts for 50% or even 40% of what you owe.

What you need to know

Debt collector hollering into micBefore you decide to try to settle your debts yourself, there are some things you need to know. First, it will probably be a time-consuming and frustrating process. You will have to be ready to field calls from angry lenders and possibly even debt collection agencies. Debt settlement will damage your credit though not as badly as a bankruptcy. Many financial experts believe that a bankruptcy will drop your credit score by as many as 200 points, while debt settlement might reduce it by only 140 points.

How to determine if debt settlement is for you

The first important question you need to ask yourself is whether debt settlement would be your best option. To answer this question you will need to look at your whole financial picture and alternatives such as a family loan or consumer credit counseling.

How to do debt settlement

As noted above, you will probably have to wait anywhere from three to five months before you initiate negotiations with your lenders. The reason for this is because they are usually unwilling to negotiate until they believe that if they refuse to settle you will file for bankruptcy and they will then get nothing.. Many experts say that the best way to begin is by writing a simple letter stating that you had run into financial problems, that your situation had improved somewhat and that you wanted to settle your debts. You should offer a partial payment of each debt if the lender agrees to remove the delinquent payments and collections from your credit report. Be sure to ask each lender to sign and send back the letter. This way you would have a paper trail in the event you needed to prove that the lender had agreed to settle for the amount you offered.

A small silver lining

While debt settlement will have a negative affect on your credit, there is a small silver lining. If you can take your outstanding balances down to zero, this might help mitigate the damage to your credit because 30% of your FICO score is determined by how much you owe. Also, many lenders will not provide credit to people who have outstanding delinquencies. So if you can settle your debts, this can put you in a position to start rebuilding your credit.

Settling debts like a pro

If you feel you have what it takes to settle your debts yourself, here are some tips that could help.

1. Talk first to an expert.

Get some expert advice from a tax accountant before you plunge into DIY debt settlement. This is because there it could have tax implications.

2. Write out a timeline

You want to settle your debts as fast as possible as this increases your chances of success and cuts the risk that you would end up being sued. The ideal is 12 months or less and you should never go beyond 24 months. Take a hard, realistic look at your finances and assets to determine how quickly you could come up with the money you will need to make the lump sum payments that will be required to settle your debts.

3. Find the money

Your chances of successfully settling your debts will increase if you can find assets or other ways to come up with the money you will need. For example if you have a motorcycle sitting in the garage or a second car that’s not absolutely necessary, think about selling it. You might also have collectibles such as coins, antiques and baseball cards you could sell. Or you might consider refinancing your mortgage, getting a loan from a family member or taking on a second job.

4. Ditch the emotions

If you’re you’re typical, you may feel shame, guilt and fear about debt you can’t manage and collection agencies and banks will try to take advantage of those emotions. Forget all this and treat the settlement as if it were a business transaction. Also, try not to get angry if you are turned down or if a lender makes a ridiculous counteroffer. Remember, it’s not about the emotions. It’s about your money.

5. Create a system

If you’re average, you will have about six accounts that you will need to settle. Multiply this by several calls a day – especially if there is one or more collection agencies involved – and you can see that you will be receiving a lot of calls. You might want to assign those people a silent ring tone on your cell phone to help manage the calls. You might also get collection calls routed to another phone – a second cell phone, a Skype account or a magicJack. Then you can listen to those messages and return the calls on your own schedule.

6. Explain the problem

There’s no way you’re going to be able to settle your debts unless you have a real hardship. This needs to be something such as you lost your job or your spouse or got hit by a tornado. It’s best if you can detail your situation so that your lenders and debt collectors will understand just how underwater you are. For example, if you’re trying to settle a credit card debt you may not need a lot of evidence. But if you’re trying to negotiate on a second mortgage, you may have to provide copies of bills and even tax documents.

7. Get it all in writing

Always get everything in writing before you pay a cent. This is especially important if you reach an agreement with the original creditor or a collection agency over the phone. If you fail to do this, the amount of money you thought would take care of your debt might end up being counted as just a partial payment. Understand that when talking to a debt collector, he will say anything to get you to pay. It’s up to you to not pay anything until you have the entire settlement in writing.

Student Loan Debt Settlement: What You Need To Know About This Debt Solution

hands chained while holding coinsStudent loan debt settlement is one of the options for those who are struggling with their debt payments. But while it is an option, you need to possess the right qualifications before you can opt for this debt solution.

Debt settlement is when you pay your creditors with a lump sum payment that is usually smaller than your current balance. You will convince the lender or creditor to accept this smaller amount and whatever it cannot cover will be considered forgiven. There are many techniques to get them to agree to this. One is to tell them that if they will not agree to settle with you, you have no other choice but to opt for bankruptcy. Most of the time, people going through debt settlement are on the brink of bankruptcy.

In student loan debt settlement, you cannot use the bankruptcy argument. That is because student debt cannot be discharged in bankruptcy. It is one of the debt types that will not be affected when you file that you are bankrupt. This makes the settlement process a bit more complicated as a student loan debt relief.

Current predicament of graduates and their student debt

Settling your debt becomes an option for consumers when they have stopped paying their monthly obligations or they are just about to do so. The only way that they can qualify for this debt solution is when they are in a real financial crisis.

Well if the qualification is a financial crisis, then a lot of consumers and new graduates will qualify for debt settlement. Based on the information from the Student Aid website, the delinquency statistic for the past two quarters are as follows:

Direct Loan Portfolio.

  • In Q3 of 2013, out of the 27.8 million student loan borrowers, 2.1 million have defaulted on their student loan. The amount of delinquent loans is $30.5 billion of the total $569.2 billion.

  • In Q4 of 2013, out of the 29.2 million student loan borrowers, 2.2 million have defaulted on their student loan. The amount of the delinquent loans is $33.8 billion of the $609.1 billion total debt.

  • The percentage of direct loan delinquents in Q4 slightly went down to 7.53% from 7.55% of Q3.

Federal Family Education Loan (FFEL)

  • In Q3 of 2013, out of the 22.9 million FFEL borrowers, 4.4 million have defaulted on their student loan. The amount of delinquent loans is $58.8 billion of the total $429.5 billion.

  • In Q4 of 2013, out of the 22.5 million FFEL borrowers, 4.4 million have also been delinquent on their student loan. The amount of the delinquent loans is $59.7 billion of the $423 billion total debt.

  • The percentage of FFEL delinquents increased in Q4 to 19.5% from 19.2% in Q3.

Source: National Student Loan Data System (NSLDS) or http://studentaid.ed.gov/sites/default/files/fsawg/datacenter/library/PortfoliobyLoanStatus.xls

The report defines the default as loans that are over 360 days delinquent. Overall the percentage of delinquent borrowers slightly decreased from 12.8% in Q3 to 12.7% in Q4. Although there is a decrease, it is too small to be considered a real improvement.

And when it comes to improvement, the job market does not give much confidence. Based on the data from the Bureau of Labor Statistics, the job market in October was not as promising as we hoped it will be. This is probably because of the government shutdown and the persisting issue about the debt ceiling. The highlights of the report for the month of October are as follows:

  • Civilian labor force decreased by 720,000.

  • The unemployed for more than 27 weeks or more is at 4.1 million.

  • Part time employees changed slightly to be 8.1 million.

  • 815,000 are discouraged workers – meaning they are not looking for a job because they feel that there is no job for them.

Source: http://www.bls.gov/news.release/empsit.nr0.htm

How to settle your student loans?

The statistics above gives us reason to believe that the borrower’s ability to pay the student loan is not improving at all. If the job market does not improve soon, the number of borrowers falling behind on their payments could increase. This means more people may look into student loan debt settlement to help with their monthly payments.

But how exactly can you use debt settlement for student loans? FinAid.org defines it as offering a lump sum payment for a portion of the debt that equivalents the full payment. The site is firm to say that it is not a new payment plan. There are two ways that the US Department of Education want to get their settlement payment.

  • Lump sum payment to be received within 90 days of the offer.

  • Installment payments that has to be completed within the fiscal year (October 1 to September 30).

Here are the other important facts that you need to know about student loan debt settlement.

  • The US Department of Education will not entertain settlement offers from debts that are involved in fraud or are results of a court judgement.

  • The US Department of Education will not settle for anything less than the default claim on a FFELP loan or principal balance of a direct loan. They will also not accept anything less than the recovery rate (percentage of disbursements). Most of the time, they accept at least 115% of the default claim or loan balance – but they can accept lower than that if the default is recent.

  • The US Department of Education considers settlement offers together with the cash flow being received from income tax refunds or wage garnishments.

  • Delinquent borrowers are advised to begin their negotiations by offering to pay half of the current amount owed less the amount of the default claim.

  • Debt collection agencies are authorized to agree to settlement that also result in the waiving of collection fees, 90% of the principal and interest balance or the full principal balance and half of the accrued unpaid interest.

Tips when settling your student debt

If there is one thing that you need to remember, it is that student loans need to be repaid at all cost. Obviously, settling student loans will not offer much debt reduction compared to other types of debt. But if that is what will get you out of debt, you may want to go through with it. A small reduction is better than nothing. But whatever settlement agreement you go into, make sure that you remember these tips:

  • Get everything in writing. It is very important that you specifically ask them to include in the document that the rest of your debts will be forgiven once you have paid the settlement fund.

  • Never agree to an amount that you cannot afford to pay. If you are dealing with debt collectors, they usually profit from commissions on the settlement fund that you will both agree on. So expect them to try and get more out of you.

  • Call the US Department of Education if you feel like the negotiation with debt collectors are going nowhere.

  • Know about the FDCPA (Fair Debt Collection Practices Act). Although the employees of the US Department of Education is not under this law, the debt collection agency that they will hire is. Do not let yourself be abused or bullied into paying more than what you can afford.

The settlement fund is ideally something that you need to possess already so you can successfully settle your dues before the time limit. If you do not have the money, you can opt to borrow from a friend or relative to help you out. If you get them to agree, you can lower your debt amount and help control the interest rate on your new loan.

You can also use your tax refund and have it considered as part of the settlement – but only if the release falls under the 90 days period after you make the settlement offer.

In the end, student loan debt settlement is effective for people who are in a real financial crisis and cannot afford their monthly payments. But do not expect too much of it and make sure you have a plan in place for the settlement fund that you have to pay off.

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.

The 7 Biggest Myths Of Debt Consolidation

frustrated woman with glassesIf you’re struggling under a huge load of debt you’ve probably heard the term “debt consolidation.” You may even understand what it means – consolidating or combining a number of different debts into one new program or loan. And don’t get us wrong. Debt consolidation can be an excellent way to get debts under control and even paid off. But there are some big myths related to debt consolidation that it’s important you know. They are.

  • Credit counselors can reduce your monthly payments by 50%
  • Some agencies can negotiate lower debt management plan payments than others
  • Credit counseling and debt management plans are all identical
  • Debt settlement is the cheapest way to achieve debt consolidation
  • If you want to get out of debt you need a formal program
  • A debt consolidation loan will always save you money
  • Your life would be ruined by a bankruptcy

Credit counselors can reduce your monthly payments by 50%

If a credit counselor tells you that he or she can get your debt cut in half, don’t believe it. As an example of this, suppose that you have missed two $200 payments so that the third payment due was for $600. A counselor with a debt management agency might be able to re-age that bill to get your payment back down to $200 but that missing $400 would simply be added back into the total amount you owe and you would end up paying interest on it..

Some agencies can negotiate lower debt management plan payments than others

Credit counseling agencies cannot negotiate lower payments because credit counseling does not involve negotiations. In the event a credit counselor tells you that he or she can negotiate on your behalf, it is really a debt settlement company. Debt settlement can be an effective way to get debts paid off but it is not the same as credit counseling. Here’s a short video with more information about the differences between these two options..

Credit counseling and debt management plans – they’re both the same

This is another myth. Credit counseling is where you have a counselor who reviews your finances and helps you develop a budget and the discipline required to make steady payments each month until your debt has been cleared. In comparison, a debt management plan is just one tool in a credit counselor’s toolbox. What a debt management plan amounts to is that your counselor will attempt to negotiate interest rate reductions with your creditors to help you become debt free quicker. You will send the credit counseling agency one payment a month and it will distribute the money to your creditors until your debts reach a zero balance. Unfortunately, statistics show that only 35% of those who enroll in a debt management plan ever actually complete it.

Debt settlement is the cheapest way to achieve debt consolidation

Debt settlement does have its pluses. In fact, it’s the only way to get debts actually reduced versus just moving them to a new lender or into a debt management plan. However, it may not be the cheapest way to handle debt consolidation, depending on the debt settlement firm you choose. Some of the shadier debt settlement companies charge big fees upfront before they do anything for you. Also, debt settlement will have a negative effect on your credit score and a harsher one then a debt consolidation loan or debt settlement plan.

If you want to get out of debt you need a formal program

Nothing could be further from the truth than the idea that you need a formal program to get out of debt. You could sit down and actually develop a budget and create your own debt management plan. Many of the people who drop out of a formal debt management plan did so because they found they could handle the program themselves. You could do debt settlement yourself by contacting your creditors directly and negotiating with them to get your debts reduced.

A debt consolidation loan will always save you moneysave money sign

The fact is a debt consolidation loan may actually cost you more money. Here’s an example of what we mean. If a lender was to tell you that it could get you financed with no out-of-pocket costs, what it probably means is that it’s simply rolling those costs into the loan, where you will end up paying interest on them. Plus, if you get out a calculator and do the math you’ll see that most debt consolidation loans will cost you a lot more over the long run vs. simply paying off the debts yourself. This is because they typically have much longer terms.

Your life would be ruined by a bankruptcy

If a credit counselor suggests that your life would be ruined by a bankruptcy, you should probably avoid that person. Yes, bankruptcy will definitely have a negative effect on your credit score and credit report. In fact, most financial experts believe that a bankruptcy would reduce your credit score by 200 points. This could drop you from having a “good” credit score to a “poor” or even “bad” credit score. In turn, this would make it very difficult for you to get any new credit for at least two to three years. However, you may be able to get some credit though it will come with a fairly high interest rate. If you work on repairing your credit, you could be almost back to normal in three to four years.

It’s also a fact that a bankruptcy will stay in your credit report for either seven or 10 years, depending on the credit-reporting bureau. But this is a case where having the stain of a bankruptcy in your credit report could be better than going without food or becoming homeless.

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.

Could A Debt Consolidation Loan Be Your Ticket Out Of Debt Hell?

Surviving Debt Despite UnemploymentThe poet and wit Ogden Nash once wrote, “Some debts are fun when you are acquiring them, but none are fun when you okay and in trouble financially and in France at an early and in about retiring them.” It’s even less fun if you’ve succeeded in acquiring a lot of debt and can’t see any way to retire it. In fact, if you’re seriously in debt and by this we mean you have a mountain of credit card debt and are struggling to make just your minimum payments, life can be a living hell.

Why take out a debt consolidation loan?

Thousands if not millions of American families have used debt consolidation loans to get out of debt hell. If you were able to get a loan large enough to pay off all of your debts, this would be almost an instant solution to your problems. It would eliminate all of those creditors or debt collectors who have been harassing you unmercifully as you would be able to pay them off immediately. Your life could become much less stressful, you could sleep better at night and when you woke up in the morning, you would have a brighter day ahead. Your debts would become more manageable and you should have a new peace of mind.

The benefits of a debt consolidation loan

Debt consolidation loans generally come with longer terms. As a result, they normally have a significantly lower monthly payment. You should also have a lower interest rate than the average interest rate of your current debts. It will be easier for you to manage your debt because you would have only one monthly payment to make instead of having to remember and make multiple payments. Last but not least, a debt consolidation loan can mean a sort of timeout during which you could repair your credit.

The two types of debt consolidation loans

Debt consolidation loans come in two flavors – secured and unsecured. If you were carrying a really big debt such as $20,000 or more, your best bet would probably be a secured loan. This is one where you are required to put up some asset as security. For most people this means their houses. You might be able to get a homeowner’s equity life of credit or a refi – which means a new mortgage. Given today’s mortgage rates of 4% or below, a refi could make a great deal of sense as you would surely end up with a much lower monthly payment than the sum of the payments you’re currently making.

The downside of a secured loan

The biggest downside of a secured loan is that it puts whatever asset you use as collateral at risk. For example, if you were to pledge your home as collateral and defaulted on the loan, your lender could foreclose on it and you might literally end up homeless.

The second type of debt consolidation loan

Unsecured loans are just that – loans for you are not required to provide any collateral or security. If you owe less than $20,000 this might be a good option. However, do keep in mind that banks are often hesitant about loaning money to people who are already having a problem with debt. Fortunately, there is a new form of lending called peer-to-peer lending where you might be able to borrow enough money to pay off all of your other debts. However, this is an area where you need to be careful because some of the online peer-to-peer lenders charge outrageously high interest rates.

The biggest negative

The biggest problem with using a debt consolidation loan to pay off debts is that you may not be able to get one. If you have bad credit and don’t own a house or some other valuable asset you could use as collateral, you might be out of luck.

Other options for paying off that debt

Of course, there are other options for paying off your debts besides a consolidation loan. For example, you could sign up for consumer credit counseling. This is where you go to an agency or company and are assigned a debt counselor who reviews all of your finances and helps you develop a plan for managing your debts. This is also a form of debt consolidation because your debt counselor will submit your debt management plans to all of your lenders. If they sign off on it, you will no longer be required to pay them. Instead, you will send the credit-counseling agency or company a check a month until you complete your plan.

Debt settlementHow To Be Smart With Debt Relief

A third way to pay off debts that’s become increasingly popular over the past few years is through debt settlement or what’s sometimes called debt negotiation. This is something you may be able to do yourself or you may need to hire a debt settlement company. If you want to do this yourself, it means contacting all of your creditors and negotiating settlements for much less than you owe. However you won’t find your creditors very anxious to settle unless you’re at least six months in arrears on your payments. You also need to be able to convince them that settlement is in their best interests because if they don’t agree your only other option would be to file for bankruptcy.

If you’d like more information on settling debt with your original creditors check out this video.

company

Most people find the idea of negotiating with creditors so nerve racking that they elect to contract with a debt settlement company. There are several advantages to this, not the least of which is that companies such as National Debt Relief have debt counselors with years of experience negotiating with lenders and are almost always able to get better settlements then people can do themselves. In addition, if you hire a debt settlement company this eliminates the need to have enough cash available to pay any settlements you would be able to negotiate yourself. Plus, debt settlement is another form of debt consolidation in that once all your debts have been settled, you would no longer be required to pay your lenders, as the debt settlement company would have assumed responsibility for that.

Other tips for paying off debt

Here are some tips for paying off debt you might find helpful.

  • Make more than the minimum payments on your debts
  • Snowball your debt payments
  • Cash out your savings account
  • Borrow from your life insurance policy
  • Hit up friends and family
  • Tap your 401(k)
  • Renegotiate terms with your lenders
  • File for bankrupty – the last resort

How Debt Consolidation Might Affect Your Credit Score

Man climbing range of credit scoresYou may not be old enough to remember a world before credit scores. This is because credit scores were invented in the 1950s. A company that was then known as Fair Isaac Corporation but which is now known just as FICO, created them. It was developed in response to a hue and cry on the part of lenders that were tired of having to read through long, complicated credit reports in order to make a subjective judgment as to a person’s credit worthiness. Credit scoring eliminated this subjectivity and created a sort of level playing field. Wherever a person applied for credit, the lender would be seeing the same credit score.

How your credit score is calculated

Your credit score is a mathematical representation of your credit file or credit report. It’s done using an algorithm that’s known only to FICO. However, we do know that there are five components that are used in calculating your credit score. They are

• Credit history
• Credit usage
• Age of of credit
• Request for credit
• Types of credit

Credit history or how you’ve used credit makes up 35% of your score. If you’ve made all your payments on time, this will help increase your credit score. Credit usage is a short way to describe the amount of credit you have available vs. the amount you’ve used. This is expressed as your debt-to-credit ratio. If you had total credit balances of $20,000 and had charged only $4000 of it your debt-to-credit ratio would be 20%, which would be viewed as a good ratio.

65% of your score

Together, credit history and credit usage makes up 65% of your credit score. The other three components make up only 35%. As you can see from this, how you have used credit and how much credit you’ve used is critical to your credit score.

Debt consolidation and your credit score

Unfortunately, the answer to the question of how debt consolidation will effect your credit score is … it depends. And what it depends on is the type of debt consolidation you choose.

If you borrow moneyHow To Make Debt Consolidation Loan Effective

If you were to choose to consolidate your debts by borrowing money to pay them off – which is normally called a debt consolidation loan – this would likely have no effect on your credit score. If you have been making your payments on time and had a decent credit history then borrowing the money to pay off your debts should be neutral. In other words, it should neither increase nor decrease your score.

Consumer credit counseling

A second way to consolidate debts is through consumer credit counseling. If you’re not familiar with this it’s where you go to a credit-counseling agency and it helps you devise a debt management plan or DMP for paying off your debts. The counselor who is assigned to your case will submit your DMP to your creditors for approval. If they sign off on it, you will have consolidated your debts because you will no longer be required to pay your creditors. You will pay the credit-counseling agency instead.

Will this effect your credit score? The credit bureau, Experian, says, “A comment may be added to the accounts in your credit report that are being repaid through a credit counseling program or debt management plan. So, lenders may see that fact. However, that comment won’t affect credit scores.”

A balance transfer

A third way to consolidate debt is by transferring the balances on high interest credit cards to one with either a lower interest rate or a zero interest rate. Although a zero interest rate may seem too good to be true, it really is true. Almost every credit card issuer now has a 0% interest balance transfer card. When you transfer your balances to one of these cards, you would pay no interest for anywhere from 6 to 18 months – depending on the credit card.

This form of debt consolidation may have an effect on your credit score. For example, if you transfer your balances to a new card with a lower limit, this will adversely affect your debt-to-credit ratio. Also, if you apply for a number of these cards, this will increase your requests for credit that, too, will have a negative consequence on your score. Finally, this new card will lower your age of credit, which would also negatively impact your score.

If you’re not familiar with balance transfers, here’s a video that explains what you need to know about them.

Debt settlement

Yet another way to manage or consolidate debts is through what’s called debt negotiation or debt settlement. This is where either you or a company you hire negotiates with your creditors to have your debts reduced. Why would any lender agree to debt reduction? It’s because for this to work you must be at least six months behind in your payments. You or the debt settlement company must convince your lenders that it is either settle or see you file for bankruptcy in which case they would get nothing.

This form of debt consolidation would definitely have an effect on your credit score. The experts in this area believe it would drop it by 80 points. This means if you have a credit score of 620, which would be considered “good,” this could drop it to 540, which would be seen by lenders as a “poor” credit score. This could make it more difficult for you to get credit and would certainly increase your interest rates. It could also mean a higher insurance premium and it might even make it more difficult for you to rent an apartment or house.

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