Most borrowers consider debt settlement as an easier alternative to bankruptcy and a better way to resolve their ever-growing debts. The prospect of getting debt-free within a short span of time, without having to pay the debt in full, pushes many borrowers towards debt settlement.
Many debt settlement companies find out about borrowers who are struggling to handle their debts through debt settlement leads and start contacting them on their own. Before going with any of these companies it is crucial that you understand a few things about debt settlement.
How it works
The best way to obtain a debt settlement is to get in touch with a debt settlement company through debt settlement leads and explain your situation to them. You will have to give them the names of your creditors and the amount that you owe them. The debt settlement company will then work out an estimate to reduce your debt and come up with a lower monthly payment. You will be advised to stop paying money to your creditors and send your payments to the debt settlement company as agreed upon.
The monthly payments that you make will be put into a savings account by the debt settlement company. Once it reaches a certain amount the debt settlement company gets in touch with your creditors and start negotiating a settlement. If the creditors are convinced, the settlement company will pay them the settlement amount, which is usually less than your full outstanding balance and gets your debts settled. They might, however, charge some fee for negotiating the settlement.
How debt settlement impacts your credit score
Although a smaller amount than what you owe, you will end up paying your creditors if you go through a debt settlement company that contacts you through debt settlement leads. Nevertheless, the time when you stopped making payments to your creditors will come haunting you if your creditors decide to report your late payments to the credit bureaus. Your credit score might drop and you may start receiving collection calls. Even after paying back your debts you will be left with a black mark on your credit report that is going to stay for about seven years or so. With a not-so-good credit score, you might find it difficult to get new loans, new credit cards, a good insurance rate, or even a good job.
Even after the debt settlement company settles your debt with your creditor, the delinquent information doesn’t get erased from your credit report. Your debt would be shown as ‘paid-settled,’ or ‘charged-off settled,’ which is not exactly the same as ‘paid-in-full.’ Also, you will have to pay taxes on the portion of the debt that has been settled or forgiven.
Who is it for?
Debt settlement is definitely not for those who wish to maintain a decent credit score throughout. You need to be ready to let go of your current status and skip the payments for a couple of months.
What are the alternatives to Debt Settlement?
Debt settlement is not your only option if you want to avoid bankruptcy. You can consider credit counseling wherein you will be given a debt management plan that will reduce your monthly payments (either temporarily or permanently) and let you pay your balance in full. Since you are clearing your debt in full, credit counseling won’t hurt your credit. Nevertheless, the key lies in convincing your creditor about your financial hardship.
Another alternative to debt settlement is bankruptcy wherein you may not have to pay anything to settle your debts with your creditors (if you file for Chapter 7 Bankruptcy). However, it can have a harsh negative impact on your credit score.
It doesn’t matter how many debt settlement agencies contact you through debt settlement leads, you should not sign up with them unless you are sure this option is going to work for you. To analyze the pros and cons and then make your decision.