Debt Settlement

Debt settlement is one of several ways individuals experiencing extreme financial difficulties can use to pay off debts and avoid bankruptcy. Although this type of program can work, there are both advantages and drawbacks involved, and you should learn about both before making a final decision whether a settlement agreement is the right solution for your situation.

An Explanation of Debt Settlement

Debt settlement is very similar to debt consolidation, in that you have the opportunity to roll all of your outstanding debts into one reduced monthly payment. As with a consolidation program, for an agreed upon fee, your debt settlement manager will work with you to establish a repayment program and negotiate with your creditors to reduce the amount of money you actually owe. This is where consolidation and settlement part ways.

Many people who resort to a settlement agreement may have already tried a consolidation program in an effort to resolve their financial difficulties, but may not have been satisfied with the arrangements or the amount of time it was taking to pay off what they owed. For these individuals, debt settlement may provide a faster way to eliminate their debts for the least possible amount of money, while avoiding bankruptcy court.

Qualifying for Settlement

You may qualify for settlement if you:

• Have a minimum of $10,000.00 in unsecured debt.
• Have reached the limit on your credit cards.
• Can only make the minimum monthly payment or less on your accounts.

Be Aware of How This Really Works

Debt settlement uses strong tactics to negotiate with your creditors. A consolidation program will likely gain your entry into a moderately discounted debt program already established by most lenders, but a settlement negotiator goes much further.

In settlement negotiations, your case manager will attempt to get your creditors to settle for a minimal amount of repayment in order to get your account off of their books. How can they achieve this? You may be a little shocked and surprised to find out.

Your settlement manager will accept your monthly payments and deposit them into your case account, but unlike consolidation methods of redistributing those payments to your creditors each month, the settlement manager will withhold all payment from your creditors in an effort to force them to drastically lower the amounts you owe if they hope to see any repayments at all. It's basically a "squeeze" tactic and can be highly effective, but it comes with a hefty price.

Pros and Cons

First, the pros:

• You may be able to settle your debts for pennies on the dollar, potentially saving you thousands of dollars in the long run.
• Your debts may be resolved within months instead of years, freeing up your cash flow much more quickly.
• The debt settlement as such will not appear on your credit record, and your accounts will eventually be marked as "paid" or "settled." (See the cons, for the other side of this coin.)
• The affects of settlements on your credit rating will drop off quicker than a bankruptcy would.
• The sooner your debts are paid off or settled, the sooner you can go about rebuilding your credit rating.

Now, the cons:

• While your payments are being withheld, you may to receive harassing calls from your creditors. The settlement company may request creditors to stop calling, but that does not mean they will.
• Late fees will continue to accrue on your unpaid accounts, piling up on your credit record. Should your creditors refuse to play the game, you could find yourself in an even greater financial mess than you started with. One possible consequence is a creditor may decide to file a case in civil court, which can lead to your bank accounts and salary being garnished until the debt is paid off. Another scenerio may lead to the creditor selling or assigning your account to a collection agency, which is also apt to have a negative impact on your credit rating.

As you can see, debt settlement can be a bit of a gamble, and your decision whether or not to follow this route will depend on just how much risk you're willing to take. Keep in mind as well, if you are already so deep in debt that you cannot make your credit card payments, many of these "cons" may occur anyway.

Protecting Your Interests

Ultimately, it is up to you to protect your own financial interests. If you decide that a settlement program is the best choice, be sure to:

• Read the entire agreement before you sign with the company.
• Make sure the company you are using is willing to specify whether you are agreeing to a consolidation or a debt settlement, and supply a written definition for both.
• Ascertain that your monthly payments will be distributed to your creditors on time, month by month, or as agreed in the settlement contract.

A reputable company will also:

• Explain all the possible consequences to your credit history right up front.
• Be willing to record every detail of your settlement plan in writing.
• Show you legal ways to restore your credit rating once your settlement payments have been completed.

If a settlement manager portrays the process as a bed of roses, you should find another company to deal with immediately. Settlement can be a down and dirty process, and you have the right to know exactly what you're getting into.

Conclusion

It's usually better to try solving your own financial issues before resorting to a settlement program that will likely add further damage to your credit history. Why not first try negotiating with your creditors personally? You might be surprised to find that many creditors will not only appreciate that you are taking steps to resolve your outstanding debts and be far more willing to work with you than you may have thought possible. It's definitely worth pursuing.

Debt settlement is a last resort, not a first. Make sure you have considered all your options first.

External Links

• Wash Your Debt, an online calculator designed to help you compute/compare alternate payment plans for your debts.

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