Many times debt seems to inescapably escalate into an even worse situation. Some consumers today are looking towards debt settlement as a way to get out of debt. Debt settlement involves negotiating with your creditor to pay less than you owe. Just as there are cautionary stories given no matter which way a consumer turns, there are cautionary tales here too. Debt settlement is not an easy way to get out of debt, does not have a high success rate, and could completely ransack your credit score. The ideal is that a debt settlement company will negotiate with your creditor so that you have to repay part of what is owed and the rest of the debt is forgiven. Nonetheless, it may not be as rosy as it sounds and there are some things that should be on every consumer’s mind when considering debt settlement.
First, see if there is a less-dramatic measure to resolve your financial dilemma. This could be debt management or going to get credit counseling as soon as possible. Once you see the warning signs, such as your income is too low to keep up with your debt or that you’re borrowing from one creditor to pay another, it is time to take action. This step may involve working with a credit counseling company, who will negotiate with your creditor and you will repay your entire debt just over a longer term plan, many times involving a debt consolidation plan. However, if you are in dire financial hardship then debt settlement may be the best route for you.
Secondly, take action immediately. Contact your creditors in haste. If your account is becoming more delinquent, some creditors will be willing to talk about debt settlement if they weigh your debt as a loss risk. Creditors may agree to receive less than the total amount owed because they would rather receive some money than not be able to collect anything from you at all.
Thirdly, remember that while you may want a clean slate and are hoping that seeking forgiveness of your debt is the way to go, this is not necessarily the case. Debt settlement has a negative impact on your credit report and your ability to borrow money in the future at affordable interest rates. Settlement companies may advise their customers to stop paying and communicating with their creditors. This is because they want you to send payments to the firm, which holds the funds in an account until there’s enough to make an offer to the creditor owed. However, your creditors will be charging you interest and fees for the missed payments. These late payments and the escalating balances have a negative effect on any credit score. Most importantly, your creditors may not accept the settlement offer and could bring a lawsuit against you and your delinquent debt.
Fourthly, if your debt is settled, there are still other issues for consumers to overcome. A consumer might now owe taxes on the debt. Further, there will be a record on your credit report that your account is settled and not paid in fill could negatively affect your report. At the very least, future lenders will chalk the notation up that you are not a responsible consumer because you could only make a partial payment in place of the total amount. Debt settlement just seems to inflame the problem of financial hardship, and make it worse.
Fifthly, you have the right to negotiate with your creditors yourself. Some debt settlement companies charge lofty prices and have hidden fees that you have to contend with. Furthermore, some creditors refuse to talk with debt settlement companies and start to play hard ball once such companies are brought into the arena. Be prepared to show proof of your financial hardship. Once the creditors agree to negotiate with you, make sure that all are in the understanding that if you give them say $5,800 to satisfy a $10,000 debt, that the remaining $4,200 is forgiven. Some creditors will take any money they can from you and then still try to collect the rest. If you do not have the $5,800 right now to settle the account in one lump sum, your creditor may let you pay the debt settlement over time. Just make sure that you negotiate a settlement plan this is realistic for you to meet.
Finally, whether you go through a company or offer to negotiate debt settlement yourself, once the process is complete, check your credit report and make sure the accounts show up properly. The account should no longer be listed as indefinitely delinquent. Also, for example, check that the report does not list the whole amount as due when a portion of the account is paid off. When consumers use debt settlement, make sure that the matter is actually settled.
To learn more about settling debt, visit the Federal Trade Commission’s Consumer webpage: http://www.consumer.ftc.gov/articles/0145-settling-credit-card-debt
Further knowledge can be gained from searching for debt settlement on the Consumer Financial Protection Bureau website: http://www.consumerfinance.gov/