Debt Settlement services and how it works
Debt settlement is the last resort you can leverage to clear a backlog of debts that you can’t pay so you don’t lose your mind and do something harmful to yourself.
A debt settlement is an agreement between you and your creditors in which your original debt will be reduced and the reduced fee collected as the full payment.
Why would your creditors agree to collect a reduced fee?
The sad reality that your creditors face is that you aren’t capable of paying the money you owe them and you’re at the end of your financial rope.
Therefore, if you file for bankruptcy which is a legal status that can be used to clear debts that you can’t pay, your lenders might be unable to collect a dime from you in the foreseeable future.
So the creditors have their hands tied and will prefer to collect a reduced sum instead of nothing.
Understanding how debt settlement works
You will contact a debt settlement company and explain your financial situation to them.
The debt settlement company will advise you to stop making payments to your creditors but to make a single monthly payment to a savings account that will be set up for you.
After saving up a reasonable sum of money the settlement company will let your creditors understand that they stand the risk of getting nothing from you unless they agree to collect a reduced fee as the full payment that you owe.
Once the new agreement is reached between your debt settlement company and your creditors, the debt settlement company will pay your creditors and you will become financially free.
Here is a practical example that you can relate with
Let’s take for instance that you’re owing your creditor the sum of $30,000 and you were supposed to make a monthly debt payment of $10,000 for three months.
But due to unforeseen circumstances, you are not able to meet the terms of your debt agreement and have $0 as your account balance but earn $7000 monthly income.
To get out of this horrible situation, you contact a debt settlement company that listens to you and sets up a savings account where you deposit money every month.
You end up paying $7,000 every month into the savings account and at the end of 3 months, you have saved the sum of $21,000.
The settlement company will then reach out to your creditors on your behalf and offer them a reduced fee like $18,000 which they may have no choice but to accept and set you free.
The debt settlement company will proceed to keep the leftover $3,000 as their fees for all their troubles.
Hope the process is now clear to you.
However, there are some advantages and risks involved in using the debt settlement method in clearing off your debts and I am about to dive into them.
Advantages of a debt settlement
Helps to avoid bankruptcy: The state of bankruptcy isn’t a pleasant one as you can lose your prized possessions and it can have a great negative effect on your credit score.
Declaring bankruptcy can also make you unemployable.
This is why a debt settlement is always regarded as the best way out of a chocking debt.
Lowering the amount of outstanding debt: A debt settlement will help to reduce the amount of money you owe your creditors.
From the example I gave above, the borrower was owing a total of $30,000 in debt and ended up paying $18,000 to get out of debt.
Let’s take a look at some of the risks involved in debt settlement
Your creditors may not agree to settle: The truth is that your creditors may not want to collect a reduced fee depending on the circumstances surrounding the money.
Some creditors won’t even be open to the idea of negotiating with a debt settlement company.
More debt on you: As you begin the debt settlement process, don’t forget that the settlement company will instruct you to stop making payments to your creditors for the time being.
The sad twist is that, even if you stop making payments on your debt, it doesn’t mean that the interest will stop increasing, it won’t.
There is more…
You may also rack up late fees and these may blow up your debt from what it was to something bigger.
Affect your credit negatively: Once you stop making payments on your debt as instructed by your debt settlement company, your creditors may not have agreed to any negotiation with your settlement company.
What this means is that all the payments you have missed can appear on your credit report as delinquent accounts.
How is debt settlement different from debt consolidation?
A lot of people tend to mistake one of these two for the other so I think it would be unfair if this topic isn’t included in this masterpiece.
A debt settlement company will work with you and intercede on your behalf to your creditors and you will be required to make a single monthly payment to them for a certain number of months depending on the amount you owe.
From the money you paid to the settlement company, they will negotiate with your creditors, strike a deal and extract their fees in the process.
Most people call this process debt consolidation but in reality, debt consolidation is quite different.
This is the act of getting a low-interest loan and using the loan to pay off your debts with high-interest rates.
This helps to erase multiple monthly payments with one monthly replacement. Therefore, simplifying the way you plan your budget and bill-payment routine.
You can also save money with debt consolidation by reducing the amount of interest that you could have paid over time.
Beware of debt settlement scams
There are indeed a lot of companies out there who claim to be professional debt settlement companies, however, a lot of them are scams that can be avoided if you observe the following;
Avoid business that makes false promises: If a debt settlement company guarantees you that they will make your debt magically go away, that’s a red flag.
Don’t forget that your creditors are not under any obligation to accept your settlement offer. Some of them won’t even work with a settlement company.
Making your debts and related issues disappear should never be a guarantee.
Do not pay fees before debt settlement: If your debt settlement company requires money before they commence work, that’s a big red flag. You deserve better.
Up to date information: Before you give the go-ahead, your debt settlement company has to explain all the pros and cons of debt settlement to you so you can make an informed decision.
If this isn’t done, BEWARE!!!
The Bottom Line
Getting yourself into a huge pile of debt isn’t the end of the world, there is always a way out.
Get in touch with Debt Relief Association for a Free Debt Review and be rest assured that there are No Up-front Fees.
We help people regain their financial freedom.
Contact us Today!