Debt Settlement

Are you deep in debt and you just can’t find a pathway out of it? It’s one of the most common problems facing Americans today. Whether you accrued the debt naturally or fell victim to one of the countless scams or identity theft, owing to an organization a lot of money is a painful, psychologically damaging experience.

One option to get out of it is debt settlement, which is a kind of relief that focuses its attention on removing debt for just a small percentage of the money owed. This form of debt relief is also known as debt negotiation, as you’re talking your way into paying just some of your outstanding balance.

The collector or credit bureau then removes what’s left. This means debt settlement is one of the cheapest and quickest ways to remove debt without having to declare bankruptcy.

Contents:

  • Debt Settlement: The Basics
  • How Debt Settlement Affects Your Credit
  • Potential Scams
  • More Specific Debt Settlement
  • Weighing the options: Is debt settlement right for me?
  • Debt Settlement vs. Other Solutions
  • FAQ

Debt Settlement: The Basics

The way debt settlement can work depends entirely on the state of what’s owed and who first makes contact to start negotiating. In general, debt settlement works one of three ways.

One can:

  1. Get an offer for debt settlement from a credit bureau or collector.
  2. Try to start debt settlement by yourself.
  3. Get in touch with a settlement organization or attorney and initiate a settlement program.

Is Debt Settlement what you need? Speak to one of our certified debt resolution experts now!

Responding to an offer

Often, debt is bought by a third-party collector. This is usually when a settlement offer comes. Agencies and buyers pick up debt that service providers, like cable or internet, or credit card companies don’t want to deal with. And they buy the debt for significantly less than what you owe. This means that getting even just a fraction of your debt would be financially profitable to them. When they contact you with an offer, it’ll be via phone or mail.

When you get the offer:

  1. Ensure to get in writing the specific offer.
  2. Confirm you actually owe the money, and also make sure the collector is legally allowed to collect. Do this BEFORE you make an obligation to give them money. For confirmation, have the collector send you all the necessary paperwork.
  3. Do not do business over the phone or in person. Only speak with the collector via mail.
  4. Remember that this is a negotiation and should be treated as such. Try to talk about what you’ll end up paying down from the first offer.
  5. Ask if the collector will pay for delete. This could take the collection off a credit report.

Settling By Yourself

If you choose to settle by yourself, you must first contact the company and make an offer. Offer just a percentage and ask for what’s left to be removed. This can be done with medical providers, debt collectors, or for medical bills. You can also do this with credit card organizations, but your account must be held by the original creditor to be allowed.

This is usually put in action when a consumer is stuck with a debt of which they want to unburden themselves, but it’s not guaranteed to work. You do have to know how to negotiate with collectors, which isn’t always an easy task.

The best results are likely to come when speaking to debt collectors who have already purchased your debt and are more willing to settle for less. Though if you are behind payments on a card and you’ll have trouble making payments, creditors are sometimes open to settlement. It will likely be at a much higher percentage, however.

Taking part in a debt settlement program

This kind of settlement is most commonly used, as it’s usually the one that gets the best results. You can settle several debts without the hassle of negotiating the cost yourself. Just call a debt settlement organization to start a program. This is how to do it:

  1. During the free consultation, the certified debt specialist performs a holistic exam of your budget and debts.
  2. They determine and recommend that debts would most effectively be dealt with as part of the program.
  3. They review your history and learn about what your goals are to ensure that settlement is correct for you.
  4. They work on ways for you to generate or acquire the money necessary for settlements.
  5. They open a Trust Account and agree to a monthly payment you can deposit in it.
  6. It’s your responsibility to send the payment every month, which grows in escrow. Then, when there’s enough, they can make offers with it.
  7. They reach out to your creditors with the first offer.
  8. After both sides agree, you will sign a document that will allocate the funds in the account to your creditors.
  9. The settlement company also takes a cut from the account.
  10. Your now-settled accounts will read “paid as agreed” on future credit reports.

We will find the right relief option for you, no matter your situation!

How Debt Settlement Affects Your Credit

A major concern when it comes to debt is just what kind of damage it can do to someone’s credit score. Sometimes, debt settlement affects a credit score negatively, but not always. While seven years is the typical penalty that one incurs from a settlement, one can mitigate it. The seven-year penalty usually begins right away, but the clock begins ticking at different times for different kinds of settlements.

  • If your debt has not left the original creditor, it begins the day your debt has been considered delinquent.
  • If the debt is settled, it starts the day the creditor or collector gets rid of the leftover balance.

Whatever the case, your account will typically read “paid as agreed” in the credit report. “Paid as agreed” is still regarded as negative information, though it will be less significant than simply not paying any of the debt.

There are some ways to avoid this, such as re-aging and pay for delete. But there’s no guarantee a creditor would agree to either method. If they do, the information can still reappear in your credit report later on. It’s important, when agreeing to settle, that you accept your credit will likely come out worse than it was before. The aim is to minimize the damage done.

Avoiding Scammers

There are many legitimate debt settlement organizations that are genuinely attempting to work with you. Unfortunately, there are also criminals that seek out the desperate and play on their desire to get out from under the rock of debt as quickly and painlessly as possible.
These criminals are savvy, usually impersonating debt collectors almost perfectly, but there are ways to spot them. The truth is, if someone is offering you something too good to be true, odds are it is.

A debt settlement scammer will take your initial large payment (they’ll always make sure you pay a lot fast) and then vanish without a trace. They’re always updating their methods whenever the internet catches on to them, though they have a few stock approaches.

Here are some telltale signs you’re dealing with a scammer:

  • They ask for payment upfront, which is in violation of the FTC.
  • The advice they’re giving you is illegal, like stopping payments to credit organizations where you have accounts open.
  • They never offer another solution beyond debt settlement, and make it seem like it’s your only option.
  • Their organization is not recognized by a national organization, like the American Fair Credit Council.

Scammers also pretend to be from organizations that are reputable, using caller ID blockers that change their location, so it’s important to listen to what they’re saying to tell what they are.

More Specific Debt Settlement

Credit card debt is the kind of debt that turns up in most settlements, though there are others that can be settled. If you are dealing with a more specific kind of debt and need to clear it but can’t afford to easily, here’s some further information.

Medical Debt

Medical debt is some of the most common in America, as unpaid bills can easily gather and become unmanageable. It may be due to insurance gaps that made you cover expenses out-of-pocket, or a recent illness that turned into a pervasive issue. Whatever it is, it’s vital that you remain proactive to avoid the damage medical bills left unpaid can do to your credit report. Keep abreast of new rules regarding medical debt as well as the ways you can solve your debt problems.

Private Student Loan Debt

While you can’t settle or remove debt on federal student loans unless you declare bankruptcy, private student debt may be settled. Certain student loan service organizations might allow you to settle a student loan for a percentage of what you owe. But it’s important not to expect too much, and to walk into the room with the correct negotiating tactics.

Tax Debt

It’s never fun owing money to the IRS, particularly if it’s a high price. When the numbers start reading more than triple digits, it can be incredibly stressful, and you’ll be desperate to settle. Fortunately, through the Fresh Start Initiative, taxpayers have a way of settling their IRS debt. This helpful overview will tell you how to negotiate and what to expect.

Find out how to settle your specific debt. We can find the right service for you.

The good

The Bad

Quickest way out of debt without filing for bankruptcy.Every settlement counts as negative information that will appear in your credit report for seven years.
On average, it’s cheaper. You could wind up paying back 48% of your debt.Sometimes, it will hurt your credit score.
Avoid the unpleasant hassles, and stigma, of bankruptcyWhile there are many reputable companies, there are also a lot of scammers.

Weighing the Options: Is Debt Settlement Right for You?

Debt settlement can be a major decision. While it’s always advantageous to get out of debt, doing so in this manner can create disadvantages that you may not have considered as carefully as you should, such as the damage it can do to your credit.

Why Settle For Less? Debt Settlement Benefits

Debt settlement is often the quickest option if your debt is credit card-related. One can also declare Chapter 7 bankruptcy, which is usually only a six-month process. But the damage that does to your reputation and the stigma around it makes it a less than enticing offer. Debt settlement can take twice as long.

But even with a limited cash flow situation, a reputable debt settlement organization should be capable of setting up a plan that will help you pay off your settlement within 48 months. This is the same time period as a debt consolidation loan takes, and you’d be removing the debt for significantly less.

The savings that you stand to make are the key advantage in debt settlement. Other solutions will concentrate on a low-interest rate, but debt settlement means APR is not even going to be an issue. You’re only required to pay back the percentage agreed upon.

So settlement is ultimately the smartest option for people looking to avoid the cost of bankruptcy. It costs $335 just to file, and that’s not including what you need to pay your lawyer. If you do intend to file, ensure you have the correct filing expectations prior to stepping into courts.

Weigh the pros and cons with a specialist now.

Getting Past The Cons

The cons surrounding debt settlement relate to the damage it may wreak on your credit. Here are the ways a settlement could damage you:

  • Every settlement will be listed as negative information without you taking proactive measures to avoid it.
  • The information remains on your credit for up to seven years.
  • If it has become a collection, the clock starts the day you complete the settlement.
  • The information will read as “settled in full.”
  • If you miss a payment of the settlement, it will also show up on your report.
  • All of this information drops your score.

The Balance calculated how much your score will drop by settling certain accounts. Settling just one card with a decent FICO score of 680 could hurt your score 45-65 points. It’d be even worse with a perfect credit rating. Counter-intuitively, having a less reputable credit score can actually offset the damage done.

Still, the damage that debt settlement can cause is probably not as bad as you’re dreading. And there are ways you can minimize the damage to your credit.

Re-aging

If the original creditor still holds claim to your account, it is possible to ask them for a re-aging of your account if you agree to pay. This essentially means the creditor will adjust your credit history to delete all missed payments. Getting rid of these can help reduce the damage to your credit that was due to financial difficulties.

Pay for delete

When settling your account, part of the negotiation can include the fact that they’ll remove the collection from future credit reports. They do this in exchange for you paying the percentage. It’s a great way to keep negative information off your credit report, though you will have to check to ensure it actually is reported correctly.

Getting The Outcome You Want

It requires a certain level of finesse and skill when it comes to reducing just how much damage to your credit score is done. However, it is possible to get rid of some of the negative credit information that results from a settlement. This can mean paying more than what you would otherwise, but it will get you a more favorable result.

Even when the damage to your credit score is unavoidable, it might not be as bad as expected. Negative information stays on your report for seven years, but how much that information hurts you decreases over the years. So a settled debt from the past year will be more damaging than a debt that was settled years earlier.

Debt settlement vs. other solutions

 BalanceDebt Consolidation LoanManagement ProgramSettlementFiling for Bankruptcy
APR0% for 6-18 months. This depends on your credit score. 13% average 0-11% averagen/an/a
Monthly $The highest available, as the intention is to erase your debt before APRMight be significantly less than current payments30-50%Might need to put aside monthly, according to budgetThe court mandates what the payment plan will be.
Credit rating requiredMust have excellent creditMust have good creditAny creditAny creditn/a
Debt >$5,000<$25,000$5,000-$100,000or more$5,000-$100,000 or moreAny
What it does to your credit scorePositive effectPositive effectPositive or Neutral effectNegative effect that can be negotiatedNegative, Chapter 7 can stay on report for 10 years
Fees3% of every balance transferredLoan origination fees, which are usually up to 1% of what’s borrowedDetermined by state, can be $69 a monthUsually, a percentage of what was settledChapter 7 filing fee: $335 Chapter 13: $310

Not including lawyer fees.

Payments before completion6-1824-4836-6012-48Chapter 7: 6-12 months Chapter 13: 3-5 years

While you try to get out of debt, it’s important to consider all options on the table. This table will help you understand what options might be best for your specific situations.

Credit Counseling

While searching for some relief from the debt you may have come across consumer credit counseling services. While not a solution per se, it can offer recommendations that will be helpful. So while it won’t get you out of debt, it will give you the advice you need to get out of debt as painlessly as possible. A reputed credit counseling service will not point you to one solution but show you the options available to you.
Credit counselors may point you toward debt settlement, but only if it’s the best choice for you financially. One thing credit counselors should never do is force a debt management program. It’s important to ensure that the counselor you’re dealing is associated with nonprofit organizations, to ensure an unbiased assessment of your situation.
It shouldn’t be a guessing game. Speak with a certified debt specialist today.

FAQ About Debt Settlement

Q: Are Debt Settlement Programs Helpful?

A: Yes! Like any solution to massive debt, it’s not the magic solution, however. While it won’t be a one-size-fits-all solution, it may be very effective. Just be on the lookout for potential scammers that will always ask for money upfront.
Some companies will offer a money-back guarantee as well. You should always check a company’s Better Business Bureau rating and other reviews from customers to ensure they’re legitimate.

Q: Will I need a professional?

A: One can structure a debt settlement themselves, though it’s not always the best idea. A professional will help you compile all your payments in one. Settling by yourself means working with the companies you owe by yourself and juggling several different bills.
Ultimately, it’s your decision. But we highly recommend getting in touch with a reputable settlement company.

Q: What Does Debt Settlement do to my credit?

A: How debt settlement affects your credit depends on your situation. Someone with pristine credit will be affected very significantly. Someone with an already low score might not be hit so badly.
It’s important to keep two things in mind:

  1. The settlement stays on your report for seven years.
  2. How much the negative information in your report affects you decreases with time. Just be sure it’s actually removed when the time comes.

Q: What will debt settlement do to my taxes?

A: This is a crucial question. The IRS includes forgiven debt along with your income. In other words, the IRS wants you to pay taxes on the balance. If you owe $20,000, but manage to negotiate the settlement to $8,000, the IRS still expects you to pay the taxes on the remaining $14,000. Fortunately, you can ask them to waive the charge. If you can show the settlement was taken due to financial hardship, then it should be clear to them you cannot pay the required taxes either.

Q: How long is the process of debt settlement?

A: If you’re only settling a single debt, the process can be as short as one month. A settlement program will take anywhere from two to four years. This is still a shorter length of time than some other solutions like debt management.

Q: How much do I have to pay for debt settlement?

A: There are fees involved when dealing with debt settlement organizations. Those fees vary depending on the company, but it’s typically a percentage of the monthly payment you agreed upon. It’s still cheaper due to the debt you don’t pay.

Q: Is debt settlement a bad thing?

A: The answer to that depends on what you hope to achieve. People looking to maintain a great credit score would do best to stay away. If your credit has already suffered some damage, then settlement might be the right option. Settlements are a good, quick exit where you’re in charge of how much you have to pay. It’s better than bankruptcy, in which the court is in charge of how you make your payments (which could involve the liquidation of your assets).

Q: Is it better to consolidate my debt or settle it?

Debt Consolidation WhenDebt Settlement Is Used When
Your debts are still held by original creditors.Your debt is in-default.
You are trying to escape damage to your credit.Your debt has been handed off to a collector.
Your credit score is good.You are not worried about the damage to your credit.
You can afford to make the payments each month.You can not make requirements for consolidation.

A: Once more, this entirely depends on your finances and what you hope to achieve. If you have a good credit score, it’s likely that you’d be better off going through consolation. If you’re not particularly concerned with your credit rating, then settling may be the more advisable option.