A debt settlement program is one of the effective ways that you can get out of debt. When it was first introduced in the market, it was not received too well. In fact, it was quite controversial.
There were a lot of debt settlement companies that came out and turned out to be scams. They told consumers in debt that they have to stop paying their creditors and instead, give the money to the debt relief company so they can put it aside and grow it as a settlement fund. While some of them really saved the money and ended up helping consumers, there were a lot of them that ran away with the money.
That was back when the recession just happened and you can rest assure that the government have cracked at them one by one. Now, debt settlement is a legitimate and popular way of getting out of debt for those who need debt reduction. But though the scammers are filtered out, you still have to be vigilant about using this debt solution.
It all begins by knowing what exactly this debt relief program is. According to Investopedia.com, debt settlement is the when you offer a large one-time payment on your existing credit balance. This payment is usually lower than your balance. Anything that is not paid off by this settlement fund will be negotiated so that the creditor will forgive. Simply put, debt settlement will allow you to pay only $12,000 for a $20,000 debt. You need to reach an agreement with the creditor to forgive the remaining debt. That is how the whole process works.
This type of debt relief program is dependent on what the creditors will agree with. If they do not want to settle with you, then you have nothing to say about it. But if you are in a real financial crisis, the creditors should be scared enough that you will declare bankruptcy. That can be a strong bargaining chip that will make them agree to your proposal.
4 things you must do after settling your debts
When you get the creditor to agree to your payment proposal and your debt is finally completely paid off, your journey does not end there. There are still somethings that you need to do in order to secure your debt payment.
To do that, here are four important tasks that you have to accomplish.
- Ask for a signed settlement document. It is vital for you to ask for a signed settlement agreement. This is to protect yourself. You may send the settlement fund only to find that the creditor refuses to follow through their side of the bargain. They will not forgive your debts. The signed settlement document will make sure that they will follow as agreed. Not only that, it will protect you from being a victim of zombie debts. Nolo.com explains that these are the type of debts that are usually already paid off or past their statute of limitations. Some debt collection companies buy these old debts and trick other people into paying them off – even if you are no longer obligated to do so. This settlement document will be your protection against them.
- Look at your credit report. The next thing that you should do is to get a copy of your latest credit report. You want to make sure that you debts are reported as paid off. It will most likely be noted as “settled” but you can probably negotiate with the creditor to change it as just “paid.” You may have to wait a couple of weeks to see this update in your report. In case you feel that it is too long and your credit report does not reflect your debt status, you can call the creditor to submit to the major credit bureaus.
- Work on your credit score. In most cases, those who succeeded in debt settlement are those who are in a real financial crisis. That means you have been delinquent on your debt payments. If that is true, your credit score have suffered. That being said, part of your to-do list is to work on your credit score. You have to improve it to start your finances on a new leaf. You want to raise your credit score so that you can enjoy low interest rates and other benefits of having a high credit rating.
- Change your budget. Now that you have used debt settlement to get rid of your debts, it is time for you to look at your budget and revise it. You need to change the entry about your debt payments. Once it was a part of your budget. Now you can funnel those finances elsewhere. It can go to your savings or your investments. Now that you do not have the debt to share in your limited income, you can work on growing your wealth further.
How to be wise with credit
While we understand that debt is a dangerous part of your finances, it is not always bad. There are certain debts that you can use to help you in your pursuit of financial gain.
Not only that, our economy will suffer greatly if we drastically reduce our spending. At least, this is an interesting idea that was presented in an article published on NBCNews.com. The writer of the article got a question that played with the idea of a debt free nation. It seems to be a good plan considering how it affected a lot of Americans negatively. But the article hinted that it may not be the best one for a country with an economy that is 70% dependent on consumer spending.
Here are some important points from the article.
- It seems like an impossible scenario. Markets usually initiate herd mentality. None of what we have in our country hints of a motivation to completely pay off debt – whether that is debt settlement or debt consolidation.
- ⅔ of the US economy depends on consumer spending for growth. If people do not take on debt, that means they will not spend too much. That is not a good thing for most businesses. If businesses lose, many people will lose their jobs.
- Credit cards create spending power. Without it, a lot of people will lower their expenses drastically. We’ve mentioned how that could lead to unemployment.
- If there is a massive debt payoff to do, people most likely will get the finances from their assets. If they cash in their stocks and bonds, that will cause their value to drop severely.
- Elimination of credit will seriously damage the financial system.
The article listed more points but you should start to see the whole picture here. There is a big problem if you completely eliminate credit. Does that mean debt freedom is not really a reality?
Yes and no. You have to know that you can continue to use credit and still be debt free. You can own multiple credit cards and still be debt free. You just have to be really wise about how you plan on spending your money – or at least the one you got from debt. Being in debt is not too bad – as long as you remain in complete control of it.
Loan an amount that you can afford to pay off. Borrow only what you need. You just have to be wise about your credit and not be afraid of it because it can be a great tool that will lead you towards prosperity – without making a mess of our economic system.