Debt settlement can be a valid and valuable option for consumers overwhelmed by debt, though a few rogue companies have given the industry a black eye. While some unethical business people have advertised debt settlement services to lure victims to their scams, that doesn’t diminish the value of honest debt settlement. In fact, debt settlement is often the best solution for many consumers.
There are a number of valid debt relief solutions, including debt consolidation, credit counseling, and even bankruptcy. Each offers advantages over the others, depending on one’s particular financial circumstances. As you go further into debt or fall behind on payments, the best option for you is likely to change. For those with payments they can no longer manage from month to month, the benefits of debt settlement far outweigh the problems created by sinking further into debt.
Benefits of Debt Settlement Plans vs. Bankruptcy
Credit card companies and other unsecured creditors will usually not negotiate a settlement of any significance unless they believe the accountholder will likely file for bankruptcy protection under Chapter 7 of the US Bankruptcy Code, which allows unsecured debts to be wiped out. Faced with the potential of not getting any money, creditors may accept less money than they are owed.
For consumers, debt settlement then offers the advantage of helping to avoid a bankruptcy filing, with the accompanying attorney costs, filing fees, mandatory pre bankrutcy counseling, and long-term effect on your credit report. Do be aware, however, that bankruptcy might be your best option. Do your research to see if the benefits outweigh the risks for you situation.
Debt Settlement Reduces Principal Owed
Unlike debt consolidation and credit counseling, which seek to lower your payments to pay off the full debt, debt settlement can wipe out part of the principal owed. You should pay less to settle a debt than you would to pay it off regardless of the payment plan and interest rate you negotiate. In today’s market, unsecured credit accounts are routinely settled for 30-70% of the original balance. For example, on a $10,000 credit card balance you should expect to settle for $3,000 to $7,000.
Compare that to paying off $10,000 in credit card debt at 5% interest (a low credit card rate) over 5 years. In that scenario, you would pay a total of $11,322. It’s obvious why credit companies would lobby the government to restrict debt settlement companies; they would rather you pay back 100% of the debt, with interest. Be prepared that convincing creditors of your inability to pay the amount in full will most likely damage your credit score.
Debt Settlement Is Fast
If your goal is to get rid of debt as quickly as possible, debt settlement is the answer. Most debt relief solutions only lower payments – payments you will be making for years.
Debt consolidation loans can have longer payment terms than the original debt because you’re just exchanging new debt for old debts. Chapter 13 bankruptcy typically provides for either a 3- or 5-year payment plan. The comparatively quicker option of Chapter 7 bankruptcy still takes a few months to be completed.
On the other hand, the debt settlement process can be transacted within a few days. Simply negotiate the amount for the lump sum settlement payment and plug the numbers into the standard contracts provided by most major lenders. Be sure to have an attorney review those contracts before you sign, and then return them with your payment to the lender. Your credit report should reflect the debt repaid within 60 days.
Build New Credit Sooner After Debt Settlement
Naturally, you will not have an optimal credit rating after completing a debt settlement program. It is likely you were already behind on payments or the creditor probably would not have negotiated a settlement. While the fact that you settled a debt does not impact your credit score, it can be surmised from your credit report. On a positive note, you can start building new credit immediately.
In contrast, bankruptcy can ruin your credit for years. If you have a job, you probably do not qualify for Chapter 7 bankruptcy. Instead, you would be forced into a Chapter 13 filing, which is similar to a credit counseling program — you receive a reduced interest rate and lower minimum payments, but you must repay the entire principal balance. During that time period your ability to open and use new or existing lines of credit will be highly restricted making it that much harder to rebuild your credit score.
In the time it takes to complete a bankruptcy process, you can take significant steps toward building decent credit again, even if you settle your debt.
Debt Settlement Is Not for Everyone
It is vital that you investigate all your options before choosing any debt relief solution. If you have the ability to repay your debts, creditors may not agree to settle debts. If you owe too much to ever pay off, bankruptcy may be a better solution. For those that fall between those two scenarios, a debt settlement program is worth considering.
Now that you’ve learned the pros of debt settlement, read on to decide if they outweigh the cons that can accompany this type of debt relief program.
If you’re having trouble paying your credit card bills and other unsecured debt find out how debt settlement can help you avoid bankruptcy and become debt free faster.