Debt Settlement
Debt Settlement, this is the scary debt consolidation choice as far as I'm concerned.
Even so that doesn't mean it's not for you.
This form of debt relief as some call it can be done by oneself, but I would say it's only for the tough. I mean nerves of steel and probably lots of attitude.
AND it requires money .
To negotiate a reduced settlement, the account needs to be paid in full right after the reduction has been negotiated.
The other big factor in debt settlement is it will negatively impact your credit.
A big concern for me, is the advertisement of this form of debt consolidation.
Many times it is quoted that you can be debt free in 12-36 months. I think they forgot to add that they meant with your first credit card debt that is being reduced.
Not totally debt free. If you were able to achieve that it WOULD only be with one possibly two cards or forms of unsecured debt.
The only way it could be done that quickly is by having the amount of money needed to negotiate with all your creditors at the same time.
When you are using a debt settlement company,
What you are doing is....
This puts you in default.
You then put the money you would have used to pay your monthly payment(s)into an account, a separate one to save up for a settlement.
As you gain the funds you try to get the best deal from each of your creditors. You usually deal with them one at a time as most people do not have the funds to deal with many creditors at a time.
As the process continues you pay one off, save funds to pay the next one.
As you can see this could take time if you have much debt to work on.
In the mean time your creditor is adding late fees to your account. If the late fees lead you over your limit, then those over-limit fees also would apply, but new legislation now prevents that from happening.
So it may be to your advantage to have as much cash as possible and as quickly into the negotiations as possible.
A few things to consider in debt settlement
Most agencies don't consider legal action unless it is profitable to do so. In the current financial arena most will be waiting for a court date, (courts are pretty tied up with debt cases), so it might not be worth it unless they think they can force a settlement which is what you want any way. You may want to move any of these companies who do start a legal process up in line for the negotiation process.
The collection agency will once taking over the account, add their hefty fee and some start adding interest though in some states this may not be legal. Research this in your state.
If you know the law (and they are hoping you don't) you can challenge them on that.
If you have many cards that you are trying to settle the best bet would be to settle the highest one and the most you can in that first 6 month period.
That first 6 month period is also a time credit card companies may give you deals on paying down the card with out interest.
It may only be a limited time and the minimum can be significantly reduced. That may be an option to keep them from adding interest while you accumulate funds.
The rest of the debt to be settled you will need time to accumulate funds necessary to continue your settlements.
In the meantime the interest could keep adding up. By the time you have enough money to settle at the reduced amount, it might only be a little less than what you started with.
Yet far less than paying the minimum payment and having that card for years with a balance over your head.
As you can see it is critical to have a plan in place when you are thinking debt settlement as a debt relief option!!
Other considerations in debt settlement
The fair debt collection practices act does put boundaries on what these collectors can do, but many are not trained properly in the law.
Experienced collectors that do know the law like to push the envelope or travel right to the edge of what is allowable.
As previously stated you need nerve and attitude in debt settlement.
My personal experience with collectors was at times amusing. The law says they cannot claim they are an attorney when in fact they are not, yet many will try and create the appearance of that profession.
Saying they are from the office of blah blah blah, and you need to return their phone call in order to stop action on their part.
That action being another phone call tonight or tomorrow.
If you are not the kind that does well with this kind of pressure, they will get quite creative, you may decide to use a company.
You will need to stringently research how credible they are and how well their performance rate is.
This is the area where many scamming schemes reside. The costs for this service can be high and there can many times be fees when accounts are not in fact ever settled.
Some companies will charge large up front fees and other will take a monthly fee directly out of the account that is set up for saving up for the negotiation eating away at the monies for the negotiation.
An article in Wikipedia suggests that those using a debt settlement company only use those that charge after the settlement has taken place. And that the amount charged should be 20% of what was saved.
The use of a debt settlement company may not stop the calls from collection companies and it won't shield you from the possibility of being sued.
Furthermore,
It has been reported that in some cases when a client of one of these settlement companies has been taken to court, the company drops them, not being in the position to give legal advice or representation.
(Real Professionals have an attorney on staff)
For these reasons you may want to require the services of an attorney in debt settlement. They will stop the calls, can shield you from the effects of court action and in the long run may possibly be able to remove the negative marks on the credit report through negotiation.
Though the price may be high, the service in most cases would be more reliable than a settlement company.
You may also find that you are eligible for bankruptcy, having an attorney to counsel you on your best course of action for your own particular situation can actually save time and money in the wide spectrum of possibilities!
How debt settlement began
The whole idea of debt settlement came about with the banks of this country setting up debt settlement departments within.
The purpose of these departments is to reduce the outstanding balance and to recoup funds before a customer files a chapter 7 bankruptcy in which all hopes of recovering the debt would be lost.
This one piece of information is the key to making debt settlement work for you!
As you begin your negotiations for a reduced amount, letting them know that you are trying to avoid bankruptcy is a big help.
The best time to start the process of settling your debt is with the original creditor early before the negative marks start. This early in the process will help preserve your credit rating.
Usually though, debt settlement isn't thought of till the situation is serious.
All options need to be weighed
In order for the process to work you have to stop payment on your accounts, this leads to a default and negative marks on your credit report. Those marks can last on your report for up to seven years.
But again if you are looking to settle most likely your credit has already taken a hit and what are your more important goals?
In debt settlement if you follow through to the end you are debt free. Then you use the cash that you were already used to saving for your negotiations to....
- Build that emergency fund
- Build a savings for the expenses that may have put you in debt in the first place.
- Fund your retirement
- Pay the mortgage off early
Whatever will put you in a more stable financial environment!
This is the very exhilarating part of debt settlement.
Learning to use cash not credit for purchases!
Generally if you buy a car with cash you can negotiate a better deal.
In the long run you pay much less as you are not paying all that interest.
You have shaved cash off the original asking price and if you did the settling yourself you have already become an experienced negotiator.
Use it!!
Settle the debt yourself
If you are attempting to settle yourself, that seems to be the more intelligent choice in terms of accomplishing the most with the least amount of money.
The original scenario presented of discontinuing the payment of all credit accounts and setting up an account to save for the settlement seems non efficient. That is how a settlement company may treat this situation.
If you are dealing with the debt settlement yourself, make a list of your balances.
Try to settle at 50-60%. List these amounts next to each balance on your list. Add these amounts up for a grand total.
Before you start the settlement process you should try to have at least that amount in hand.
Saving, selling assets that you can do without, selling household inventory (appliances, gadgets) things you don't need.
Whatever can be done to get the needed funds before you start.
Keep in mind the greater reductions can sometimes be had from the collector that takes over after the debt has been charged off.
They buy the debt pennies to the dollar. The chance and room for reduction is greater and they usually hold the debt for only 6 months themselves and then it's off to another agency.
The collection officer will get a commission on any retrieval of funds so there may be much more willingness to negotiate on their part.
Also the account is usually noted that it is in collection and it's removal can also be negotiated. You will need a formal written statement of the agreement. Make sure it's in writing or it won't happen and don't send the money till you get that statement.
Note that the collection note can be taken off but the original lender notation that it defaulted and was not paid as agreed will remain. The collection agency has no sway over that.
What debt settlement can not do
There are some debts that settlements can not handle.
mortgages
child support
tax payments
If you owed $4000.00 and your creditor settled for $1700.00 according to the IRS you made 2300.00. You will be taxed on that amount unless you can show that you are insolvent. There is a special form to fill out for that, consult your tax professional.
Insolvency means that you have more debt than income.
Even if you are concerned with the credit aspects remember; credit scores are calculated and based on the last two years of activity.
Once the settlements are finished and some time has gone by the settlement will be less of a consideration.
If you have other debt that your settlement activity could not take care of, you will now have the savings discipline to use that money to accelerate those payments.
Even in bankruptcy it is said the quicker you work on good credit the less the bad will be looked at.
Debt settlement can be a scary option, but with a well thought out plan and all the details considered it can certainly work to your success!!
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