If 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 on 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.
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
Before 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.