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What is debt settlement? It’s a debt relief option that consists of contacting your creditors and settling your debt for much less than you actually owe.
Why debt settlement works
When lenders such as credit card companies can’t collect on your debt, they often decide to sell it to a debt collection agency. It is not unusual for them to sell it for twenty cents on the dollar or even ten cents on the dollar. This doesn’t mean they will agree to settle your credit card debt for 20% or 10% of what you owe. However, in many cases, they will accept a decent offer – especially if you are having serious financial problems. In fact, the key to negotiating a good settlement is to convince your creditor that if it refuses to settle, your only recourse will be to declare bankruptcy.
The pros of debt settlement
The major pro or upside of debt settlement is that it is the only way to reduce your debt. That means you become debt-free in a much lesser time. The other techniques for managing debt includes debt consolidation loan, consumer credit counseling or credit card balance transfers. These can help you better manage your debts but do nothing to reduce them.
Get rid of those persistent debt collectors
You can include all medical bills and unsecured debts in excess of $1,000 in your settlement arrangement. This should free you of those persistent debt collectors who keep calling and harassing you. Settled debts aren’t subject to any legal actions or any other form of collection.
The cons or negatives of debt settlement
Before you start calling creditors and suggesting debt settlement, you shouldn’t have made any payments on your debts. At least do not pay for six months or more. This is bound to leave a black mark on your credit report and will definitely lower your credit score. Second, you may have to pay taxes on the debt that is forgiven. In other words, if you were able to settle $20,000 in debt for $10,000, you may have to pay income taxes on the $10,000 that was forgiven.
It is a gamble
Debt settlement can be a gamble because not all creditors will agree to settle with you. If you stop making payments on your debts for six months and then learn some of your creditors won’t settle, you would be in even worse shape than when you started.
You will be to have cash in hand
The biggest con of debt settlement may be the fact that you must have the money available to pay your settlements. For example, if you were able to settle a $10,000 debt for $5,000, you would have to have the $5000 available to instantly send the creditor. In fact, this is one of the selling points of debt settlement – that you will pay the settlement immediately.
You can only settle unsecured loans
Debt settlement is a good alternative is you have unsecured debts such as credit card debts, medical bills, and personal loans or personal lines of credit. However, secured debts, including mortgages, homeowner’s equity lines of credit and auto loans cannot be settled.
Leave it to the pros
If you owe more than $7,500 and debt settlement seems like a good alternative, let us help. Our experienced debt counselors can handle the settlements for you and probably save you thousands of dollars. In most cases, they help our clients become debt free in 24 to 48 months. Give us a call today or fill in the form on this page to get more information. We’re ready and anxious to help.