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If you’re not familiar with debt settlement, here’s how it works. You can negotiate with your creditors yourself or you hire a company to negotiate with your creditors to get your debts and interest rates reduced by as much as possible. You save as much money as possible into a settlement fund. It puts the money into a trust account and uses it to pay off your creditors once all of them have signed off on the settlements. While debt settlement does have an effect on your credit, it is a way to avoid bankruptcy and will have less of an impact on your credit than if you did file for bankruptcy.
Secured debt vs. unsecured debt
One thing to consider before signing up with a debt settlement company is that you need to have probably more than $10,000 in unsecured debts. Unsecured debts are debts such as credit card debts, personal loans and medical bills. This is because debt settlement companies can’t do anything about secured loans such as mortgages and auto loans. And why do you need at least $10,000 in unsecured debts? It’s because if your debts are less than this, a cost benefit analysis will show that it may not be worth hurting your credit score for this amount - even for as little as 12 to 24 months.
Unregulated could mean fraud
One of the biggest problems with debt settlement is that debt settlement companies are mostly unregulated. It’s different from debt consolidation and credit counseling, which is where a consumer credit counseling agency will work with you to create a repayment plan so that you can pay off all your credit card debt in 4 or 5 years. It’s also different because settling with your creditors is a more aggressive form of debt relief and requires you to save up your cash instead of wasting it on minimum payments which mostly go for interest charges.
Because this industry is largely unregulated, there is a lot of room for fraud. There are companies offering scams where they take big fees upfront and then vanish. Other of the debt management companies are just inept or too inexperienced to negotiate good settlements. Regardless of which, the result is the same–your money is down the drain and your financial situation is as bad or even worse than before.
Your credit score will be impacted
Even if you choose a and honest and ethical debt settlement company that does everything it promises, debt settlement will still have an effect on your credit score. Any time you are not able to pay your bills on time it’s bound to have a negative affect on your credit score. And the better your score, the greater the effect will be.
Creditors may “go legal”
More and more creditors including the big credit card companies (Chase, Capital One, Citibank and Bank of America) are using debt collection law firms that are sometimes very quick to file suit. And if they file a successful lawsuit, your wages can be garnished or liens put on any property you own. Some creditors will immediately “ go legal” or file a lawsuit the minute they hear from your debt settlement company.
When debt settlement does make sense
Debt settlement can make sense when you choose a reliable and ethical company such as National Debt Relief. We have years of experience helping people like you get out of debt. Our debt professionals will work with your creditors to reduce your balances as much as possible. Instead of having to pay many big bills each month, you will make one low monthly payment. It will be an amount you can handle and your payments will be put into an FDIC insured trust account. With National Debt Relief you can expect to settle all of your debts within 24 to 48 months of starting your debt settlement plan. If you need help with debt, be sure to contact us or fill out the form to get a free quote. It could be the best thing you do this month.