General articles discussing everything one needs to know about debt relief and how it ties into your personal finance situation.
Many people who hire a debt settlement service end up dropping out of the debt settlement program before any progress has been made on their debts. These people may not have been educated on how the debt settlement process works and why it could take months before anything is paid toward debts, even when they’ve been sending in payments to the debt settlement companies for months.
The Creditors Have to Be Willing to Settle
Debt settlement is a negotiation. For a negotiation to be successful, both parties have to be willing to negotiate. When all your monthly payments have been on time, your creditors probably aren’t interested in settling your accounts. They don’t have any reason to believe you won’t make your next monthly payment on time. However, when your accounts fall behind by several months, creditors are often willing to take a settlement offer instead of possibly having to take a total loss on your account.
You typically need to be at least 90 days late before your creditors will settle your debts. More often though, you need to be at least between 120 and 150 days late to make a settlement offer that the creditors will accept. That’s why, even though you’ve been making payments to the debt settlement firm, nothing has been paid to your creditors. If the settlement firm made any payments to your creditors, then settlement negotiations would be severely hindered.
You Need Enough Money to Settle
Many creditors will typically settle accounts for around (more…)
After you’ve been enrolled in a debt settlement program for a few months, you might check your credit card statements to see if your credit card company has received any payments on your behalf. If you’ve never done this before, you were probably shocked to see that most likely no payments had been made and not only were you months past due, your balance probably went up because of all the fees and interest. Don’t worry, it’s all part of the usual debt settlement process. This is typically necessary for successful debt settlement negotiations.
Your debt settlement firm should explain how debt settlement works and maybe they’ve tried, but they didn’t do a good job. So, here’s a rundown.
Deposits and Settlement Fees
Most likely, the debt settlement firm has been receiving your monthly payments and putting them (more…)
If you’re haunted by an overwhelming amount of debt that you can barely pay, you’ve probably considered bankruptcy. However, many people shy away from bankruptcy because it can be a lengthy process that stays on your credit report for at least 7 years and can follow you for life (since most major loan applications ask if you’ve ever filed bankruptcy). For many people, debt settlement emerges as an appealing alternative to bankruptcy.
Negotiating a Debt Settlement
Debt settlement is a process through which you and a creditor negotiate a payment that’s less than the original amount owed. The creditor agrees to accept this lower payment as full satisfaction for the debt.
Why would a creditor agree to a debt settlement? A creditor who’s being paid on time every month has little incentive to accept a settlement offer. You’re likely to continue making timely payments to preserve your credit score. However, on the other end of the spectrum, if you’ve fallen severely behind on your payments, the creditor would get much less from the debt, or nothing if you simply decided not to pay or filed bankruptcy.
Once you’ve reached a settlement with the creditor, you make (more…)
If you’re doing your own debt settlements, one of the most important steps is confirming the settlement offer. Once you get the creditor to agree to a debt settlement, you should get an official agreement from the company before you make payment. If you make a payment without having such a letter, things could go wrong. Worst of all, the company could continue to ask you to send payment claiming they didn’t make a settlement agreement. Before you make payment, get a settlement letter from the company that includes specific information.
What Your Settlement Letter Should Include
- The letter should be on company letterhead, regardless of whether you’re dealing with a collection agency or the original creditor. This company letterhead helps make the settlement offer official and helps show the offer came from someone within the company.
- The letter should include a date so you know when the settlement offer was made.
- Make sure the correct (more…)
Many debt settlement companies are now required by federal law to tell you about any consequences of debt settlement before they sign you up for their services. Also, this new federal rule likely applies to all settlement companies who pitch their services to you by phone. Other companies should tell you for the sake of disclosure, but the federal law doesn’t require them to, so they may not.
Even if you settle debts on your own, there are certain drawbacks that you should know about before you go into the process. These drawbacks don’t necessarily have to change your mind about settlement, but it’s better that you aren’t surprised by what may come.
Settlement isn’t guaranteed.
Debt settlement is just a negotiation process. While many creditors and debt collectors do settle debts for less than what you owe, not all of your creditors will agree to settlement. Settlement is more likely when you’re far behind on your debts or when they’re outside the applicable statute of limitations. But, other debts you may have to pay in full.
Settlement doesn’t erase negative history.
When you settle your debts, it doesn’t remove (more…)
By the time a debt goes to a debt collector, it’s usually become so delinquent that the original creditor has given up hope of collecting it. This is often the best opportunity to settle a debt.
The Economics of Buying Debt
Debt collectors often purchase debts from creditors, lenders, and other businesses for a fraction of the debt amount. For example, if you had a debt of $1,000, chances are the debt collector purchased it for something like $10 to $100. The older the debt is, the less money the debt collector has likely paid for it.
Even though debt collectors have purchased the debt for less, they’re still allowed to collect the face value of the debt. However, since they’ve bought it for less, they will often accept payment that’s less than the face value of the debt because anything more than what they’ve paid is profit. For example, if the debt collector paid $100 for your $1,000, you may be able to settle it for $200 to $400. That’s still considerably less than the original $1,000. You pay less, the collector gets a profit and everyone is happy.
Now, you can understand why many debt settlement companies promise (more…)
If you’ve been researching debt settlement, you may have read about its “devastating” effects on your credit score. The potential damage to your credit score may cause you to rethink using debt settlement as a debt solution, but all is not lost. Let’s take a look at how debt settlement actually does hurt your credit score.
Credit Score Calculation
Your credit score is based on five key types of information:
- How timely you pay your bills
- How much debt you have
- How long you’ve had credit
- The types of credit you have
- The number of recent credit applications you’ve made
When you settle a debt, it affects the part of your credit score that considers timely debt payments.
Two Effects on Your Credit Score
In the debt settlement process, your credit score will take (more…)
New FTC Rules for Debt Settlement Firms
This year, the FTC passed new rules that change the way many debt settlement firms operate. The new rules are intended to provide protection for consumers to ensure they are not taken advantage of in the debt settlement process. These rules do not apply to non-profit debt settlement companies. But, for-profit debt settlement firms engaging in interstate telemarketing must follow the new rules.
Debt Settlement Telemarketing Rules
Interstate telemarketers who sell debt settlement services have to disclose certain information to consumers. This includes:
- The amount of time necessary to achieve the represented results.
- The amount of savings needed before the settlement of a debt.
- A warning of any potential damage done as a result of not making timely payments to a creditor.
- Details and rights about a dedicated bank account used by the consumer.
Debt settlement firms can’t lie about or misrepresent their services, success rate, or entity status.
Rules for Advance Fees
One of the things that prompted the FTC to pass these new rules was (more…)
There are many options for dealing with your debt and none of these options will likely fit every single scenario. Debt settlement is a debt solution that lets you pay your creditors a percentage of the total balance. When the creditor agrees to this settlement deal and you make payment, the balance is satisfied, you no longer owe any money to such creditor. It sounds easy – pay less than what you owe and call it a day. But, there’s more to it than that.
You can’t afford to pay off your debts.
If your current monthly debt payments are too high for you to pay and you don’t see an end to the financial problem, consider debt settlement. On the other hand, if you’re making your minimum payments just fine and you can actually afford to pay a little extra, then you may want to consider snowballing your debt. That’s when you make an extra lump-sum payment to one of your debts every month until it’s repaid.
You can’t get a debt consolidation loan.
To get a debt consolidation loan large enough to pay off your debt, you typically either need to (more…)