Debt Settlement Introduction
Borrowers with mounting bills, increasing fees and insurmountable stress can negotiate their debts with creditors, called debt settlement. Debt settlement is an agreement between the borrower and the creditor to pay a certain percentage of the total amount currently owed.
Different than debt consolidation where consumers are given one large loan to pay off several debts, debt settlement is when the borrower works with an agency to negotiate a lower debt, while advising the borrower to stop paying the bills and save up money to be used in the settlement.
Why would creditors agree to take less money instead of pursuing what they are owed? A little known fact is that creditors would rather collect some of the debt than none, especially when the borrower is on the brink of having to file bankruptcy. Creditors may settle with the borrower to retrieve between 20% to 75% of the balance, forgive the remainder, but will report the activity to the credit bureau.
Debt Settlement Benefits
One of the biggest and most obvious benefits of debt settlement is being able to pay off debt for less amount of money. Debt settlement companies that work with MortgageRefinance.com often save clients tremendous amounts of money—up to 40% to 60% depending upon the creditor.
Additionally, some creditors will even remove negative information from the borrower’s credit report which may help improve the borrower’s credit score.
Another debt settlement advantage is that the process is relatively fast. Once the creditor is paid the agreed upon amount, the balance is back up to zero. Also, the nightly creditor calls will cease once the debt is paid. A good debt settlement company will take action to reduce or completely eliminate calls.
Of course another important benefit is that the borrower can avoid bankruptcy. Although both methods impact the borrower’s credit report, a bankruptcy can drop an individual’s credit score by up to 250 points whereas debt settlement may only reduce the borrower’s score by 50 points. Plus a credit score impacted by debt settlement is easier to repair than one hit hard by bankruptcy.
Some methods to repair a credit score after debt settlement include keeping some credit accounts open, joining a credit union, repaying unsettled loans and opening a savings account. Remember, a bankruptcy stays on an individual’s credit report for up to 10 years, whereas debt settlement only lingers for two years.
Finding the Right Debt Settlement Company
Like any major financial decision, individuals should seek a reputable debt settlement company to assist with every aspect of settlement. To start get a free debt settlement quote. Ask for recommendations from family and friends—inquire about fees and how the debt settlement company negotiated lower balances. Another way to identify a strong debt settlement company is to research several companies and arrange for an initial consultation. Compare and contrast different companies until one company fulfills all needs.
Back up researching by referring to the Association of Settlement Companies for a list of reputable debt settlement agencies. Settlement companies evaluated by this association are found to be sound and competent. Another way to determine the soundness of the debt settlement company is to check with the Better Business Bureau.
When meeting with the debt settlement representative, ask about the company’s service guarantee, terms and conditions up front. Work out the conditions and details of the relationship with the debt settlement company before beginning negotiations so both parties have a clear understanding of all terms and conditions.
To speak with a professional get a FREE Debt Settlement Quote
After Debt Settlement
Staying out of debt is equally as important as getting out from underneath it. In fact debt settlement companies that work with MortgageRefinance.com offer counseling to assist customers to avoid some of the common pitfalls of falling into debt.
One obvious way to avoid the same trap is to spend less money. Create a budget, stick to it and allocate funds for specific expenditures. Another way to stay on track is to refuse additional credit cards. Pay cash as often as possible and use credit cards for emergencies only.
Ask the debt settlement representative for tips and ideas on ways to remain out of debt and how to develop healthy financial and spending habits.
Debt Settlement Companies are Illegal in Some States
Consumers living in Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia and Wyoming should avoid using debt settlement companies. These states forbid for-profit debt management operations. Even if the consumer lives in one of the “forbidden” states and works with a debt settlement company in another state—it’s still illegal.
Todorova, Aleksandra. “Debt Settlement: A Costly Escape.” MSN Money 6 August 2007.
Puliam Weston, Liz. “When Debt Settlement Makes Sense.” MSN Money. 16 June 2009.