Debt settlement companies and programs can help eliminate debts.
If you are having trouble paying your bills, you should consider debt settlement, which can also be considered as a form of negotiation that results in the overall improvement of your financial condition. Debt settlement is when you (or most likely a company your partner with) attempts to reduce and negotiate down the principal on your outstanding unpaid bills, late fees, as well as other debts.
If successful with the process, you can eliminate anywhere from 40-60% of the outstanding balance. All forms of debt can be settled, including credit card, medical, possibly car loans, and more. The creditor will then forgive this amount that you didn’t pay, thereby assisting you with getting back in control of your financial future over a reasonable period of time. Find more information below, as well as details on which credit card issuers or lenders offer debt settlement programs.
How can debt settlement help you?
It can assist with reducing your credit card debt, payday loans, past bills that you owe on car loans, or other expenses. It can even provide a consumer with settlement on any unpaid personal loans that they may have. In other words, these programs offers various forms of assistance. Some of the many benefits of debt settlement include the following:
Allows you to avoid bankruptcy: If someone is successful with the debt settlement process, you can eliminate a large percentage of your unpaid bills and any debt burden. This will then allow the individual to pay off the remaining balance on their bills, and do it somewhat comfortably, over a usually extended payment period. They will not have the threat of bankruptcy hanging over them.
To start this process you can negotiate directly with a collection agency or your creditors. The primary goal is to try to settle your debts for only as much as you can afford to pay. Or you can use the services of a third party, such as a debt settlement company or non-profit credit counselor. If you settle your debts this way, out of the court process, then you will not need to file for bankruptcy protection.
Single payment: You will have to make just one, single monthly payment to the settlement company instead of paying multiple bills to different creditors each month. This simplifies the individuals bill paying process and reduces the risk of further delinquencies. The monthly payments made are accumulated into a trust account that will be used to pay off your creditors when the negotiations are complete. This will help you avoid the stress of paying various debts at different interest rates at a different times. You will also not longer need to deal with several different creditors at the same time.
Stop unfair collection practices: It will allow you to avoid unfair harassment and collection practices by debt collectors if you negotiate a settlement. They will stop calling as the amount that you owe will be greatly reduced and the clock on when the money is due will be “reset”.
Eliminate extra fees and charges: The debt settlement company should be able to eliminate late payment fees and charges, if you have any. Any over-the-limit fees on credit cards or bills can also be greatly minimized, if not eliminated by way of the settlement process.
Avoid legal actions or a lawsuit: Creditors or debt collectors can file a lawsuit against you, get a judgment order, garnish your paycheck or wages, or place lien on your property. You should be able to avoid such legal actions and lawsuits if you're in a settlement program. So the settlement program will in effect offer you help with debt collectors.
How exactly does a debt settlement program work?
While the process may vary slightly based on your approach, in general debt settlement companies will offer a program to those who need help. The organization you partner with will negotiate with your creditors or collection agencies on your behalf. The companies will typically charge you an upfront fee for their services, but you can also find providers that you only need to pay if they save you money, so they in effect work on a contingency basis.
Whether you decide to use a credit card debt settlement program or try to use a program that settles other debts, such as personal loans, you will need to stop paying your creditors. However only due this one you are told to do so by the company you are working with. Instead, any monthly payments you make should be sent directly to the settlement company, which will then deposit the funds into a trust account in your name.
After enough funds are accumulated in the trust account, debt settlement companies will proceed to negotiate with your creditors, collection agencies and attempt to stop all collection efforts. In effect the settlement process is a form of “outsourcing” to a company you are partnering with.
Bills or debts you can settle - You can settle medical bills, credit card debts, store/gas cards, personal and payday loans, etc. Debts that can’t be settled normally include alimony, tax debts, mortgages, child support, car loans and federally insured student loans.
How to settle medical debt - You do need to know that negotiating with a doctor or a hospital is usually easier than negotiating with other types of lenders. This is the case as medical care is a service and medical providers as well as hospitals are more reluctant to sue you. In general a health care provider is more willing to come to terms with you. Find ways to settlement medical debt.
How much will I need to pay for settlement
Regardless of the type of account being settled (whether medical, payday loan, or credit cards) debt settlement companies typically charge about 25-35% of the balance that is eliminated under these programs. The fees are based on factors including :
- How much you will save by settlement.
- How much debt you owe in total.
- The total number of accounts you have.
About how long will it take to settle my debts
No matter what type of debt or expense you are trying to settle, it usually will takes 2-4 years to complete the program. The exact amount of time it takes to complete the program will depend upon many factors. What often comes into consideration includes your total debt amount, your total income, any fees that couldn’t be waived, and other factors.
Can creditors sue after settlement?
No. After you compete negotiation and proceed with a debt settlement program,, collectors as well as other creditors can’t come after you for the balance and they can’t sue you in most states. It is illegal in most states such as Texas, Arkansas, Georgia, Michigan, Washington and many others. Make sure this is documented as part of the agreement agreed upon.
What credit card issuers offer programs?
Many companies offer debt settlement programs to consumers who ask for them. If you enter into a program on your own you may be able to save money as you will not need to pay a third party. Find examples of Bank of America debt settlement programs and how they are helping people across the country. Discover Card, JP Morgan Chase, and Citibank also make programs available to customers who need help. There may be other options as well, and find a comprehensive list of credit card settlement programs from all the major issuers.
It is possible you may owe taxes on your debt
After you go through a debt settlement process, or if you go for credit card settlement, creditors will forgive a substantial percentage of what you owe them. The amount that is forgiven, which is then known as cancellation-of-debt (COD) income. Note that this may be taxable as per IRS guidelines. However, if the debt is settled because of a protest, you usually will not need to pay taxes on that amount.
How does debt settlement affect my credit score
There will be an impact, but it is less than many alternatives such as filing bankruptcy or never paying a bill. When you stop paying creditors and accumulate funds to eventually settle the debt, some of your outstanding accounts may be charged off by the creditor. What this means is that the creditors may no longer consider your unpaid bills as collectible. The creditor may even decide to sell off your account to a collection agency who will then try to collect the debt from you (but as noted above this may be illegal).
It is important to note that when the debt settlement companies start negotiating with your creditors about your bills, the creditor at that point can’t send it to a collections agency and agree to accept a partial payment. The creditor will then report your account status to the various national credit bureaus, such that it appears on your next credit report as "Settled charge off".
A “Settled charge off" will impact your credit score much less negatively than a bankruptcy filing. So while there may be a impact on your credit report, it could be worse. So the bottom line is that a credit card debt settlement, or the reduction on any other bill or debt, will almost always hurt your credit score for the time being. However, it is a shorter term impact as after the account is paid off in full, your credit scores will improve gradually if you keep making timely payments towards your bills as well as any other liabilities. It is easier to repair your credit from these programs than it is using some alternatives.
Pros and Cons
Like all options and most things in life, there are various pros and cons in debt settlement. There are various things to consider. Find a more detailed analysis on should you use debt settlement. Some customers also consider consolidating their bills, which is a different approach. Find more details and compare debt settlement vs consolidation, as they do have their differences.
How can I repair my credit after debt settlement?
You have several options. They include the following. But it will take time.
- Open a savings account: Just go ahead and open a savings account and deposit cash as well as any other funds into it every month. Once you have enough funds in the account, you can then pay for unexpected expenses without having to use a credit card. Having a savings account will also allow you to take out a small loan. You can even use your savings account and get a secured credit card, which is the next step we recommend.
- Obtain a secured credit card: These type of credit cards are usually easily available to those with low or poor credit history. They can even help people with limited savings or anyone without a bank account. The intent of such unsecured cards is to help one improve his or her credit score, or even start to build history.
- On-time payments: Pay all your rent, mortgage, and utility bills on time. Paying bills on time is one the quickest ways to rebuild your credit rating.
- Store/Gas cards: These types of cards are easy to qualify for. Once you get such credit cards, you need to use them every single month and pay more than the minimum payment. Ideally you want to pay off the entire balance each month. Try not to use more than 50% of the credit line on these cards at any one time. Once you are able to show a positive credit history on an account, you can then apply for a higher credit line.
- Avoid unnecessary credit on your accounts: Never take out unnecessary credit, and do not increase your debt-to-income ratio. Also, avoid taking out payday loans right after the debt settlement process has concluded, because in case you fail to repay a personal or payday loan, that will hurt your credit scores even more. Then of course you'll end up in debt again.
The bottom line
Debt settlement programs are a solid option that you should explore. The program is but one of the many resources available. In many cases, the provider will also offer free credit counseling and repair services. When successful, they can provide an easy way to get out of debt, including credit card and medical. It can even involve the outsourcing of the process to a specialized company, thereby saving you time.
They are not always perfect, as there are a few restrictions to credit card debt negotiations. You need to try to make sure that you deal with any of the debt settlement companies (BBB certified) that are reputable. Be sure you read the find print and that they can negotiate to offer you the best deal as well as save you the most money on any debts you have outstanding.