Debt settlement can be a viable credit relief option for someone who is suffocating in debt. Also known as debt negotiation or debt settlement, this process involves negotiating with your creditors for them to accept a lower payment as the full settlement for what you owe them.
Some people choose to stop paying off their debt and instead save the money to hire expert negotiators who will try and agree with the creditors to take a reduced payment. However, since its introduction in October 2010, mainly by for-profit debt settlement companies, this method doesn’t really work. Here are a few reasons why:
- Collection agencies will always be on your back when you stop making payments.
- Creditors can take legal action when you stop making payment such as garnishing your wages or putting a lien on your house.
- Missed payments will lower your credit rating and make it difficult for you to receive financing in the future
- When you approach a debt reliefcompany, expect to pay high upfront fees, which they will recover when you start making payments the first few months. Remember, these debt settlement companies are in the business of making money and will compensate for the effort it takes to convince creditors to take the lump sum amount. Should you not qualify for the settlement, they will still need to be paid so you remain with debt even after having spent a lot of money settling fees.
- Many debt settlement companies are seen by lending institutions as a scam and therefore not taken seriously.
Regulations are being introduced to cover the debt settlement industry and avoid taking advantage of people who are already in debt. For instance, the government may ban upfront fees or limit how much debt settlement companies can charge when offering their services. Companies that offer consolidation loans are required to provide their clients with clearly written contractors that explain exactly what they’re paying for.
Advantages of debt settlement
- You will end up paying less than what you owe. Some creditors even agree to 20% of the loan amount.
- You can start afresh after two years of paying off the debt since your credit score will be completely repaired if you were working with a non-profit debt settlement company.
- You will avoid creditors who often come knocking on your door as soon as you stop making monthly payments. With debt settlement, you don’t deal with creditors directly and this often gives you peace of mind.
- You will not be forced to file for bankruptcy, which could ultimately destroy your credit for many years.
Disadvantages of debt settlement
- You will need to pay a lump sum, which is usually difficult if you are in great financial trouble.
- You may end up paying the for-profit debt settlement company hefty fees even if the creditors do not agree to settle.
- It may take 6 to 7 years for your credit rating to recover
- Creditors may not agree to take a reduced amount, which forces you to consider other consolidation options.
