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 40% to 60% of the balance at the time of settlement. That balance will probably be higher than what it was when the last payment was made because fees and interest have been accumulating. For example, a $4,000 balance may grow to $5,000 by the time the creditor is willing to settle.
Creditors usually want settlements paid in lump sums and not in increments. So, the money in your settlement account needs to be large enough to actually make a reasonable settlement offer. For instance, if you have a $5,000 balance and the creditor is willing to settle it for $2,500, then you need to have that much accumulated in your settlement account so you can pay the settlement if a lump sum is required. Odds are, your account balance isn’t large enough yet.
Let’s say you’re making $400 monthly payments into a settlement program and when you entered the program you were current on all your payments. Five months or 150 days later, the creditor is ready to settle for no less than $2,500. Your settlement account balance would only be $2,000. That’s not enough to settle if a lump sum payment is required. And if your settlement firm has already deducted its fees, then your settlement account balance is even lower than that.
Settlement companies who sell their services by phone are most likely required to charge you only after the account has been settled, which makes the process faster. If you signed up in person, then that rule doesn’t apply.
The more you can put toward your debt settlement each month, most likely the sooner you’ll have enough money to settle your accounts. But, if your payments for your settlement account are low relative to your debt load, it will take longer for your settlement account to reach a balance that can most likely be used to negotiate.