One of the most common questions people ask about debt is how to settle their debt. The truth about debt settlement is that it causes even more financial troubles in the future. If you want to learn the truth about debt settlement, or if you’ve been hoping to try debt settlement as a way to eliminate your debt quickly, you’ll need to do a lot of research to make sure that this is the right solution for you.
Defining Debt Settlement
If you want to know the truth about debt settlement, you’ll need to learn some of the following definitions.
- Debt Settlement – the act of negotiating to pay less than the full amount you owe on your debt. Commonly, this is done through a company that withholds your payments to the creditor and puts them into an escrow account. After you have saved up a certain amount of money, the company then attempts to persuade your lender to take that amount in full and forgive the rest of the debt. The truth about debt settlement is that it has a very large and negative effect on your credit score.
You can actually do this on your own by negotiating with your lender directly. But some people prefer to continue making their own payments and waiting until you have enough money put aside to persuade them to settle.
Debt management is a program that allows you to enter with a third party company. The debt management companies then negotiate with your lenders to attempt to get lower interest rates and payments for you. They then put you on a plan for repayment. You can then make your payments on your debt through the third party company. This also has a large effect on your credit score.
Debt Consolidation is defined at the act of consolidating all of your debt accounts into one. This usually happens in the form of a new credit in which to pay off all of your accounts. This only works well if the new loan or line of credit comes at a lower interest rate than one or all of your current accounts. Most people seek out the help of third party companies to help them with this task, but many companies are only looking to earn more money. The truth about debt settlement is that it’s a trap. The better way to consolidate your own debt is by
- Applying for a balance transfer credit card
- Applying for a peer-to-peer loan
- Using a home equity loan
These are three different ways to use new credit to pay off old debt at a lower interest rate, which makes your payments easier to manage and help you pay off your debt faster. However, it’s important to understand the difference between these three things. If you simply Google search one of them, the other two will pop up, which makes it hard to understand what a company is advertising and what steps you should take.
Data on Debt Settlement Shows It May Be More Harmful than Helpful
Now that you’ve learned the truth about debt settlement, it’s importance to know that this is what sounds like the quickest and easiest way to eliminate debt (besides bankruptcy). Most people seek out the help of debt settlement companies in the hopes that it will allow them to take action and get a fresh start when it’s all finished. Sadly, the new data shows that the very opposite may be true. A report shows that a nonprofit research group has found that consumers who sign on with for-profit debt settlement companies find that their debts grown around 20% on average before a settlement with no guarantee that any settlement will be reached. As your payments continue to go unpaid (the tactic debt settlement companies use to negotiate for the settlement), your debt will continue to grow (no thanks to interest and fees) and there’s no guarantee that the settlement will be successful in the end. In fact, this article goes on to say that the percentage of clients successfully completing a debt settlement program was in the single digits. Adding on to the bad news, debt settlement, which is often used as a last resort before bankruptcy, can actually begin the path towards bankruptcy. Typically, consumers consider debt settlement as an alternative to filing for personal bankruptcy. But many people have ended up seeking bankruptcy protection despite having gone through debt settlement. Settlement companies usually will negotiate credit card debt, but often may not include medical or tax debt in their services. So many people who have a broad mix of debt do not get the relief that they need.
The truth about debt settlement is that if you’re battling multiple types of debt even a successful settlement may not cover all of your debt, which leads you to a position in which you have to find more relief in the end.