If you or someone that you know is experiencing the stress of having debt collectors hound them for money they simply don’t have then you may want to learn about the process of debt settlement. This is a process where you are able to reach an agreement with creditors that will reduce the total amount that is outstanding on your accounts. This is a good option for regaining your footing if you have lost income or had any other major unplanned financial catastrophes. There are some caveats when you are considering pursuing this route, however. Let’s take an in-depth look at this process and see if we cannot answer any questions you may have.
How Does Debt Settlement Work?
Settling debt can typically only occur as a last resort when the creditor has lost hope of ever recovering the full amount that is owed. You will need to have several missed payments or even accounts placed in collections before this will become a viable option for you. Once things have gotten to this point however you will often receive contact from the creditor agency.
You will need to get the help of a settlement company. These companies will act as a liaison between you and the creditors. Now during this time, you will cease making payments on your outstanding debts entirely and instead put the money into a savings account. At some point, the savings account will have grown large enough for the settlement company to negotiate a lump-sum payment that will rid you of the debt once and for all.
The settlement is not available for all types of debt. For example, both a car or a home can be reposted by the lender in the event of default. Make sure that the type of debt you are trying to settle is able to qualify for settlement before putting a bunch of work in.
Common Questions About Debt Settlement
If you are in dire straights financially then the above information probably seemed at least mildly interesting for you. There are some common questions that you will want to have answered before deciding if this is the route that you want to take. Below are some answers to the most frequently asked questions about settling your debt.
What is Debt Settlement?
Settling your debt involves using a company to negotiate a lump sum payment alternative to paying off your debt accounts. The end result will usually have you paying less overall then if you had not pursued this option at all. It is a last resort action though as there are some negative consequences associated particularly with your credit score.
How Does Debt Settlement Affect Your Credit Score?
Since you will cease paying towards your debt while building the settlement account balance they will go delinquent. Delinquencies have a strong negative impact on your credit score. Perhaps the worst part of all is that these delinquencies will stay on your credit report for 7 years dragging your score down the whole time.
You can learn how you can repair your credit in a few simple steps !
How do Taxes Work with Debt Settlement?
In the eyes of the Internal Revenue Service, any Debt that is forgiven is the same as income. This means that any debt that you have that is forgiven will be subject to tax at the end of the year. This is something to plan for because it could end up being a significantly large expense. Consider consulting a tax expert if you are unsure how this will affect your returns at the end of the year.
Are There Fees Associated with Debt Settlement?
While it is against the law for the settlement companies to charge an upfront fee that does not mean that their services are free. The most common fee schedule for these companies is to charge a percentage of the total amount of the debt that is settled. There can be other fees associated with the service as well such as upfront setups fees or monthly fees to maintain the account.
Should I Work with a debt settlement company ?
The best way to determine if you should work with a debt settlement company is to look at your financial situation and see what options are available. If there is no sign of things improving and your credit score has already been beaten up pretty bad then it could be a good option to help regain your footing financially. There are some other alternatives that many of these same companies could help you out with as well. If you are interested in relief it is wise to explore all of your available options.
How to Determine if Debt Settlement is Right for You?
The best way to decide if the settlement route is the best route for your financial situation is to speak with some experts. Always make sure that the company you are working with is an accredited organization that has a decent track record of success with their customers. Be cautious of any company that is asking for compensation before they offer you any help or even a consultation. A Reliable company that works nation-wide like Consumer Credit Card Relief will provide you the steps to debt settlement.
Settling Credit Card Debt
Settling the debt of your credit cards can be a good way to get rid of those balances quickly. It can lead to the accounts being permanently closed though. If you are interested in continuing to use the cards long term there may be better options out there for you to explore. One of the most popular alternatives to settlement is debt consolidation. This is where you get a new finance partner to essentially purchase the debt of your outstanding balances but give you better terms so that it is a lighter burden in your finances. This can help you to avoid many of the negative effects that are associated with the settlement process like the damage to your credit report.
In fact, in many cases, people have found that by going through the consolidation process they actually see an improvement in their credit scores. This is because all of the accounts will stay current and open. This will make it look like your total credit utilization is lower than it was before the consolidation. All of your cards will stay open as well so you can still use them in the even of an emergency.
Now, this process does require a warning. It can be better for you in terms of your long term financial health and credit scores but there is a significant risk with this move. Since all of the cards will remain open it is up to you to not just rack up the balances again. If you are not careful you could wind up short in an even worse position than the one that you were in before.
The Bottom Line on Settling Credit Card Debt
At the end of the day, there are few facts that are important than the state of your finances. If you have made some mistakes in the part and you cannot seem t get ahead now no matter how hard you try there are some solutions out there that can help. While it is not the best solution for everyone getting your debt settled is a good choice for many people. It can help to alleviate financial stress very quickly.