If you’re struggling to get a grip on your mounting debts, you may be intrigued by the idea of debt settlement. Whereas other forms of debt relief may reduce your effective interest rates by a few percentage points, the debt settlement process can cut the principal balances on your outstanding liabilities to just a fraction of their original size.
Most unsecured debts are fair game, making this process a potent weapon in any debt relief arsenal. In fact, debt settlement has the potential to be far less expensive than bankruptcy because it doesn’t require the intervention of a lawyer.
Debt settlement is a great deal for many consumers who find themselves saddled with tens of thousands dollars in high-interest unsecured obligations. Unfortunately, it may not work out so well for folks struggling with smaller debt loads.
Your tolerance for debt depends to a great extent upon your income. If you’re pulling in a six-figure salary, you can probably run fairly high credit card balances without much trouble. You may not start worrying about your debts until you’re carrying balances to the tune of tens of thousands of dollars.
On the other hand, many folks don’t have the luxury of a six-figure income. If you spend most of your meager earnings on food, clothing and other household necessities, even a few thousand dollars’ worth of high-interest debt might prove unmanageable.
Most debt settlement companies politely decline to work with folks who carry less than $10,000 in unsecured debts for one simple reason: Debt settlement generally isn’t in the best interest of consumers who lack a five-figure debt load.
The debt settlement process tends to worsen its participants’ credit scores in dramatic fashion. These hits are shorter-lived than those that accompany the bankruptcy process, but they may still make it difficult for participants to obtain credit for a year or two after the settlement process has terminated.
If you’re carrying a total debt load of $5,000, a willing debt settlement provider might be able to save you $2,000. In exchange, you’d have to wait a few years to see those savings and be unable to secure a traditional loan or credit card during that time. It’s up to you to determine whether you’re willing to trade several years of crippled credit for a few thousand dollars in savings.
Credit counseling offers a meaningful alternative to debt settlement. You don’t have to meet a minimum debt threshold to gain an audience with a reputable credit counseling agency. In fact, these non-profit outfits specialize in working with lower-income borrowers for whom any amount of debt is too large.
Alternatively, you might wish to bypass the fees associated with credit counseling and work your way out of debt on your own. This do-it-yourself approach is the most straightforward of all debt relief options.
To get started, stop using your credit cards and unsecured personal credit lines. The transition may be jarring, but you’ll soon appreciate the forced discipline of a cash-only existence. When you strike out on your weekly errand run, carry only as much cash as you’re willing to spend.
Next, use all of your available funds to reduce and eventually eliminate the balance on your most expensive credit card. Focus the entirety of your financial firepower on that single balance and don’t let up until it’s gone. Repeat this process until your debts are gone for good.
While it’s unfortunate that you need $10,000 in unsecured debt to work with a debt settlement company, you shouldn’t fret about things that you can’t change. If your debts are worth less than $10,000 but still won’t go away on their own, resolve to pay them down by yourself or seek out a friendly credit counselor for advice.