When it comes to seeking debt relief, many Americans feel the only viable option they have is credit counseling or filing bankruptcy. What many people are not aware of is the little known process of debt settlement. The goal of debt settlement is to, first off satisfy your creditors for less than what they claim you owe and two save you as much money as possible during the process.

One reason many people choose a debt settlement company is because their debt amounts are too high for them to realistically manage to payback in full and want to avoid bankruptcy. Another reason why thousands of Americans choose a debt settlement company is because they are extremely upset and fed up with the credit card company over the fact that their interest rate has increased to an unfair high rate like 28 - 30% and the company refuses to lower it no matter how much you plead.

The number one reason why Americans choose a debt settlement company is because their desire to have closure on being in debt and their priority of becoming debt free becomes their number one goal. This outweighs any real or perceived thought of any negative impact that it could have on their credit history while going through the process of debt settlement.

According to the Fair Isaac Company your debt to credit limit ratio accounts for more than 30% of your score, so it becomes absolutely essential to eliminate your debt first when you are trying to improve your credit score. Also remember your credit report is only a snapshot in time and is never a permanent record, you can recover and improve your credit score over time. Everyone gets a second chance in America!

The banks would love to keep you in the mind set that your credit score is absolutely the most important part of your life and by not paying them back in full would decrease your score and put you in the gutter forever. By all means your credit is important but should not completely dominate your life. This mentality works in the bank’s behalf and keeps you in fear, just where they want you.

Think about it, if the banks were really concerned about you and your credit score, then why extend to you more credit on your current credit card so you can charge more when they know that this will decrease your score. So do they really care? NO.

When researching the option of debt settlement as your choice to become debt free understand that there are basically two types of companies to use when considering who you will choose to settle your debts. First there are the very common non-lawyer based debt settlement companies which comprise of over 95% of the companies currently advertising over the internet and TV. The rest are law firms that practice debt settlement as one of their services.

In the rest of this article I am going to list some of the major important points that you need to consider when choosing a debt settlement company to help you become debt free. As well as give you a warning sign for each point when speaking with the representative of a debt settlement company.

1. The company should save you at least 40% of your debt including fees and paying your creditors.

You can usually save 20% on your own with a little effort but any more than that requires experience and negotiating savvy.

Warning Sign

When you are speaking to the representative from any debt settlement company you need to be cautious and do your homework. There are many debt settlement companies that just want to make as much money as possible without any real regard for the client’s best interest. A lot of these representatives will say just about anything that pleases you to enroll you in their program. One way to recognize this type of company is by the tactic of setting a monthly payment amount to whatever the client wants. Usually, it’s very low and for a much longer period of time than what other reputable companies offer. This defeats the purpose of their claim of saving huge amounts of money because the interest keeps growing and the consumer does not realize that the longer the payback plan time frame the less they save.

2. Make sure your payback plan is in a realistic time frame to complete this process.

The major benefit of debt settlement is to become debt free in a very short period of time verses paying minimum payments to the credit card company which averages over 38 years to pay back. You should choose a debt settlement company that will focus and emphasize on enrolling you to becoming debt free in two years or less, but only under specific circumstances no longer than three years.

Warning Sign

By stretching a debt settlement payback plan farther than three years you’ll never receive the full benefits that you were told in the beginning. Why, because of accruing interest. In other words the percentage of money your saving on the original debt decreases drastically when you enroll in a program that has you paying for four or five years because the debt amount drastically increases.

3. Make sure the collections calls will be stopped.

One of the negative aspects of debt settlement is that you do need to fall behind in order for these creditors to be willing to accept less. While falling behind you will get barraged with calls from collection agencies. Simply put these can be very annoying, scary, embarrassing, and aggravating. Now when it comes to preventing collection calls from 3rd party collectors, only by retaining a lawyer to represent you will stop them from calling. The Fair Debt Collection Practices Act states that if a client has attorney representation the 3rd party collector by law must deal with the attorney and not the debtor. Once the collector has been notified but continues too contact you directly then the collector becomes subject to a potential law suit.

Warning Sign

If a representative from a non-attorney based debt settlement company tells that they can stop the collections calls ask them how and why the collector has to abide by what the debt settlement company claims. By law, the collector does not have to deal with them. Typically their advice is to send a cease and desist letter; this can stir up a hornets nest. While this may stop the calls it will leave the collector no other option of contacting you to collecting the debt. So if they wish to continue to pursue with their collection attempts they will have to serve you papers to appear in court, meaning that you will be sued.

4. Make sure the company is reputable.

A good place to start is to check the Better Business Bureau (BBB). Next thing to consider is how long the company has been in business. Also look for a membership in T.A.S.C., the regulating body for debt settlement as this organization sets ethical standards for its members. A general rule of thumb is to look for a company that knows what they are doing and have settled many people’s debts in the past. Be sure the company discloses that this process will negatively impact your credit score and that they cannot guarantee how much debt will be settled.

When it comes to law firms you have an extra layer of protection, the bar association. Check the state bar for the attorneys standing if you are going with a law firm. The attorneys are held to a higher standard by being a member of the bar association. With unanswered complaints to the bar an attorney can lose his/her license and business. The attorney cannot get another law license and just open up somewhere else. So it is in their best interest to do the best job for the client. Attorney based companies will often charge higher fees however than non attorney companies so weigh your options carefully and make the decision that is best for you.

Warning Sign

This is pretty obvious, if a company has an unsatisfactory record with the BBB and is not a member it would be best to stay away. If a law firm is not in good standing with the bar in other words under investigation, then stay away. If the company is relatively new and is showing some of the warning signs mentioned above, definitely stay away.

While debt settlement can be a very smart and viable option for many you need to be very cautious about the organization you are employing. By following the points and warning signs above you will greatly reduce the risk of being enrolled into a program that will not benefit you.



Thanks to Christina Costa for contributing this article to our Bankruptcy blog:

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If you are behind on paying your debt, beside debt consolidation, there is another method to settle your debts with your creditors; this process is called Debt Settlement. Debt settlement or also know as debt negotiation, is a process of contacting your creditors and negotiating a lump sum to payoff you debts. Sometimes the negotiation is initiated by your creditors; they may send you a letter offering you with a settlement amount, most of time is less than 50% of you balance if you make the payment in full within 10 to 20 days.

Debt settlement can be the most economical option for you to get rid of your debt. But there are some drawbacks. This article will review the negotiate terms to payoff your debt using the debt settlement method and alert your on the debt settlement drawbacks.

How Negotiate Terms to Payoff Your Debt

You can do this yourself (DIY), but if you think you are no confidence in getting it done, you can also hire a professional debt negotiator (also know as arbitrator) to do it for you. Debt settlement with amount 50% or less than your balance is a common practice in the market as the settlement in full.

Debt settlement can save you the most money in interest and principal payment; but you need to have the money to make lump sum payoff of your debt. Thus, you need to determine your current financial affordability before choosing this option to payoff your debt.

One thing you should keep in mind is because you are negotiating with your creditors to outcome an agreement to settle your debt with some reduced amount. Some creditors will report that remaining amount as “deficiency balance” to the credit bureaus as a negative item and it will be noted at your credit report and impact your credit scores. Hence, if you can arrange a deal with your creditors so that they will NOT report the deficiency balance then that will be your best course of action; if not, your credit will suffer for 7 years.

Determining What You Can Afford

First of all, you need to determine your affordability to get the money for lump sum payoff of your debt. The common ways of getting this money are through saving, tax refunds, home equity loan, second mortgage or refinance your existing house & etc.

If you are planning to get the lump sum of money through a loan, you should analyze your ability to borrow the money and reviewing your repayment capability of your new loan, else you may drop into another debt trap later.

You may get the service from a professional debt negotiator to set up a payment plan for you and negotiate with your creditors once you have saved the money for the settlement.

Which debt to settle first?

Usually the best debts to settle first are the ones which charge higher interest rates, and that will make the most dramatic change in your monthly budget.

Choosing a professional debt negotiation service

Debt negotiation services have more resources and knowledge to help you get the best payoff for your debt. Selecting a reputable debt negotiation agency is important for you to get the best service out of it. Develop your own list on the potential debt negotiation agencies and check them with the Better Business Bureau at www. bbb.org. We recommend ADNS (Attorney Debt Negotiation Solutions) Services for debt settlement services because they offer a free consultation with a financial analyst.

Summary

Debt settlement can be the economical ways to get rid of your debts. But you need to analyze your ability to borrow or access money, as well as reviewing your debts, and the monthly payments you could afford, to see if settlement is right for you.

Cornie Herring is the Author from StudyKiosk.com. “StudyKiosk-Credit Basics” is an informational website on credit basics and debt consolidation. To see recommended, credible lenders and loan service companies, visit: Recommended Bad Credit Debt Consolidation Services and Lenders



Thanks to Cornie Herring for contributing this article to our Bankruptcy blog:

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Can you answer randyxd’s question about Bankruptcy?:

I filed for bankruptcy in 1998. Recently in my credit report there was a public notice saying it was discharged.

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Can you answer ariel_okinawa’s question about Bankruptcy?:

In other words, my bankruptcy was discharged at the end of March, when will the credit report relect which accounts were thrown out in the bankruptcy?

Thanks!
DAS: I know that the items stay on the credit report, but they will have a note indicating that the were included in the bankruptcy so that any future creditors can see that the debt is not outstanding.

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Debt settlement is a form of debt relief that can be helpful for people who are in specific situations. However, there may be other alternatives that will be more beneficial. If you do choose to go through with debt settlement, there are a few things that you need to know.

Debt settlement is for those who have debt that has been charged off and given to a collection agency. Once the debt is with a collection agency, different tactics are used to receive payment from you. Collection agencies are usually more aggressive, using phone calls, letters, and other methods to encourage you to pay them what you owe or to settle with them. Because they bought the debt from the original creditor at a lower price, they are willing to settle for a smaller amount as they can still make money off of it. That is what debt settlement is all about.

You can directly negotiate a settlement with each collection agency and come up with an amount that you both can agree to that can cancel out your debt. Unfortunately, you must pay the amount agreed to in full. No payment plan will be accepted. However, this amount can be significantly less than the original amount owed, so it can give you significant savings.

Once you have settled with a company, you will no longer receive pestering phone calls and letters from them. You will have to repeat the process with each collection agency you have debt with in order to get the matter resolved in full. Your credit report will reflect that you have reached a settlement on that debt, so your credit score will not entirely bounce back. Another benefit of debt settlement is that by settling with the collection agency, you eliminate the possibility of receiving legal action because of the debt in the form of a judgment.

One problem to look out for when settling debt is that forgiven debt larger than $600 is reported to the IRS, and thus subject to taxes. This is a cost that should be considered when determining if debt settlement is right for you. Also, beware of companies who offer to negotiate debt settlement on your behalf. They are not able to obtain any greater benefits than you can do on your own, but they will charge you a large fee to do it. They may also require you to pay them up front while they try to work out a deal with the collection agencies.

If some of your debt is not yet been charged off and is still with the original creditors, you will most likely benefit from a debt management plan instead. This type of plan has you pay off your debt in full over a reasonable amount of time. This can work out because creditors like to see that you are working to pay off your debt and will offer you better interest rates. If this is something that might interest you, talk to a credit counselor today.

Debt settlement is not right for everyone. Before agreeing to any settlement or to work with a debt settlement company, do your homework. Find out if this is the best deal for you. If you are unsure, talk to an accredited credit counselor who is more familiar with the options available and the tricks that debt settlement companies might try to use on you.



Thanks to Ronnica Rothe for contributing this article to our Bankruptcy blog:

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