What exactly is debt settlement? According to Wikipedia it’s a way to approach debt reduction where the debtor and creditor agree on a reduced balance that the lender then treats as payment in full.
Debt settlement has proven to be a godsend for thousands of Americans who found themselves deep in debt with no hope of ever getting out of it.
If you find yourself in this position debt settlement could be your best hope.
But before you rush off to contract with a debt settlement company there are truths about debt settlement you know and here are seven of them.
Debt settlement is not a right
No law makes debt settlement a right. Lenders are encouraged to be open to debt settlement when borrowers are in terrible financial shape but they’re not obligated to agree to settle or to accept your terms. The only right you have is the right to apply for debt settlement but this is as far it goes. The laws and regulations published by the Federal Trade Commission and the Consumer Financial Protection Bureau are there to protect you from abusive practices, harassment and to prevent you from being swindled but there is no law that lenders must settle any debts.
Creditors may say no
When a company such as National Debt Relief first approaches a lender with a settlement offer, the lender may very well say no. In fact, this is very possible. However, a reputable debt settlement company will not give up. It will continue doing its best to reach a settlement with that lender. This is one of the best reasons to hire a debt settlement company. Its debt counselors are trained to be patient and persistent and to continue contacting that lender until they can reach a settlement that’s fair to both it and to you.
It may not be their favorite option
There are a several different options for debt relief such as a debt consolidation loan, a balance transfer or credit counseling. Credit card companies also have alternatives to debt settlement they may prefer. Their decision to settle or not settle will be based on the debt counselor’s skills and your financial situation. In some cases, a lender may offer to lower its interest rate – in lieu of settling the debt – or to waive payments for several months so that you’d have time to get organized and caught up on your debts. There are credit card companies that will also offer to convert the debt into a loan with fixed monthly payments and a fixed term.
Using a debt settlement company costs money
Debt settlement companies are for-profit companies and they charge for their services. Many of them charge a percentage of the amount of debt that’s being settled. This can vary from 15% to 25%. However, even at this a good debt settlement company can save you money. Here’s an example. Let’s suppose that you owe $17,000 in credit card debts. It’s likely that the debt settlement company could settle those debts for 50% of their balances or $8500. Let’s further suppose it charges a 20% fee or $3400. In this case, you would still save $5100, which is definitely nothing to sneeze at., Plus using a debt settlement company would save you from the pain and harassment of having to deal with angry lenders and nasty-tempered debt collectors.
Not everyone can use debt settlement
Lenders will rarely, if ever, discuss settlement unless you’re at least 90 days behind on your bills and owe more than $8000.
Also, there is a point where most lenders will write off your debt and sell it to a debt buyer or debt collection agency. Once this happens, not even the best of the debt settlement companies can negotiate a settlement because the lender no longer has any reason to settle. This can happen after 90 days or 120 days depending on the lender.
Debt settlement will have a bad effect on your credit score
No one knows precisely how much debt settlement will affect your credit score but it will damage it. The website Credit says that debt settlement can hurt your credit score almost as much as a bankruptcy. There are two reasons for this. First, the debt settlement company may take three or even more months to settle a debt. This is a time when no payments are being made on your debts so they will be reported to the credit bureaus as late or even as in default.
Second, when you have debts that were not reported as “paid as agreed,” or “paid in full” this will definitely cause your credit score to take a hit because you did not live up the promises you made when you borrowed the money.
If you need more information as to how debt settlement will effect your credit score just watch the following video.
You can settle debts yourself
There’s nothing that says you can’t settle your debts. In fact, that’s much cheaper than using a debt settlement company where you would be charged a fee. But there are a couple of reasons why most people choose to use a debt settlement company.
You’ve already read one of them. It’s that using a settlement company frees you from the burden of having to deal with your lenders and debt collection agencies, which can be both angering and frustrating.
Second, it’s almost impossible to settle a debt unless you can offer to make an immediate payment to the lender in the form of either a cashier’s check or wire transfer.
What this means is if you were able to settle a $7500 credit card debt for $3500, you would need to have $3500 ready to send to that lender. The sad fact is that people who are struggling to repay their debts rarely have enough cash available to make that kind of payment.
A third reason why people turn to settlement companies is because they understand they aren’t good negotiators. It takes skills and experience to be a good negotiator and most people lack both. Negotiating with a lender to settle a debt can be a difficult and scary experience and most people choose to not have to deal with it.
