If you’re considering debt settlement, you probably have dozens of questions about how this debt relief option works. Here are answers to some of the most common questions.
What is debt settlement?
Debt settlement is a process that lets you pay a percentage of your outstanding debt after negotiations with your creditor. In exchange, the creditor cancels the remainder of your debt. For example, your creditor might settle a $10,000 debt for just $4,000. The creditor cancels the remaining $6,000. Specific results vary by creditor, but debts are generally settled for 10% to 75% of the outstanding debt.
You might consider debt settlement if you’re experiencing financial difficulty, you can’t pay off the debt on your own in 2-4 years or you’re on the brink of bankruptcy.
Does debt settlement ruin my credit?
There is potential damage to your credit rating. In fact, federal law requires debt relief companies to let you know any negative consequences of debt relief. Your credit rating can be negatively affected if you go through debt settlement. The specific damage you receive depends on several factors, including your credit rating at the time of debt settlement.
Debt settlement will only remain on your credit report for up to seven years. Fortunately, you can work on improving your credit score as soon as you’ve completed the settlement program.
Is debt settlement better than credit counseling or debt consolidation?
Debt settlement has some benefits over credit counseling and debt consolidation, but the best debt relief option for you depends on your unique situation. In some cases, your debt settlement payments can be lower than those on a credit counseling agency’s debt settlement plan. Debt settlement doesn’t require you to have a good credit rating as debt consolidation often does.
Is debt settlement better than bankruptcy?
One likely benefit of debt settlement over bankruptcy is that debt settlement falls off your credit report generally three years sooner. Bankruptcy can remain on your credit report for up to 10 years, while debt settlement will typically drop off after seven years. With debt settlement, you don’t have to get the court involved in your finances. Many types of applications will ask if you’ve ever filed bankruptcy and you’re expected to answer honestly, even years after bankruptcy has been removed from your credit record.
Finally, you may be unable to file for the type of bankruptcy that discharges your debt without requiring monthly payments. Before you can file Chapter 7 bankruptcy, you must pass a means test proving your current monthly income (as defined in chapter 7 of title 11 of the United States Code) is below the median income in your state. We all know that just because you make a certain amount of money doesn’t necessarily mean you can afford to pay back your debt. However, the bankruptcy law considers it abusive to discharge your debt if you make above a certain amount of money. This type of income restriction don’t apply with debt settlement.
How long does debt settlement take and how much does it cost?
It generally takes clients to complete debt settlement 24 to 48 months. But, there is no exact time frame for settling a customer’s debts because results vary depending on the amount of debt, the monthly payment you make and your creditors’ willingness to settle on your accounts.
How are fees charged?
Pursuant to federal law, for-profit debt settlement companies are generally not allowed to charge and collect any fee until after a debt has been settled.
What happens to my monthly payments?
Before a settlement offer can be made to your creditor, you typically need to have saved up enough money to pay the settlement all at once. It’s not as common for a creditor to accept a multiple-payment arrangement on a settlement, so you should likely have all the money upfront.
Your monthly payments are typically placed in a FDIC account where they accumulate until a creditor accepts a settlement offer. Then, the debt settlement company pays the settlement on your behalf and then typically subtracts their fee from your account.
Will debt settlement companies send payments to creditors on my behalf?
Because of the nature of settlements, debt settlement companies generally do not send monthly payments to creditors on your behalf. If your accounts are current when you enroll in a debt settlement program, they will likely become delinquent and possibly even charged-off or sent to a collection agency.
Creditors, generally, do not accept settlement offers until an account is at least 90 days past due, sometimes more. So, if you enroll in a debt settlement program, it is usually with the understanding that your account will become increasingly delinquent. The same is probably necessary if you attempt debt settlement on your own.
How can I fix my credit after debt settlement is complete?
You should start by checking your credit report to make sure all the settled accounts have a $0 balance and are noted as settled. Next, you should open new credit accounts to begin establishing a positive payment history. If you don’t qualify for a regular credit card, you could save up a security deposit for a secured credit card. The more positive payments you add to your credit report, the more your credit score will likely improve.
How do I know if a debt settlement company is legitimate?
The Better Business Bureau can be a good source of information about the reputation of a company. The service provider we work with has settled over $1 Billion in debt. No other debt settlement company has settled a bigger debt amount than them. They are accredited members of The American Fair Credit Council (AFCC), formerly known as The Association of Settlement Companies (TASC), which is the largest trade association in the debt settlement industry. They have also won several industry awards, including the 2008 Ernst & Young Entrepreneurs of the Year for the Northern California region.
Can debt settlement companies stop creditors from contacting me?
While debt settlement companies would like for your creditors to deal only with them instead of you, creditors have the right to contact you about the debts you owe them. Fortunately, there are legal ways you can stop some of their calls.
Will I owe extra taxes?
It’s possible that you may face additional taxes, but because of the complexity of tax law, you should consult a tax professional to get specific details about your tax situation.
Why do I need a debt settlement company? Can’t I do this on my own?
Yes, you can certainly try to settle debts on your own. But customers hire debt settlement companies to get the benefit of their experience and expertise. For example, our service provider has settled over $1 Billion dollars in debt, so we know that our service provider has what it takes to negotiate successful settlements with creditors. When you settle debts on your own, you’re committing yourself to a probable steep learning curve and trial and error in the negotiations. Plus, you generally must be disciplined in saving up for a settlement. If you miss payments or dip into your settlement savings, your debt settlement progress likely gets set back.