If you are dealing with a heap of debt, you may choose to work with debt collectors and creditors making things more manageable. This is termed as ‘debt settlement’. For instance, you may settle your debt by making the creditor accept a lower amount if you make a lump sum amount in advance. Debt settlement is one of the best ways through which you can lower the burden of debt off your shoulders. Let us get to know more about debt settlement and the things that revolve around it.
What is Debt Settlement?
Debt Settlement can be termed as a process in which you pay off your creditor following a mutual agreement to pay an amount less than what you actually owe. also known as debt arbitration, debt negotiation or credit settlement, is an approach to debt relief in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full. Only unsecured debts are considered for the settlement comprising of medical debt and credit card bills. Generally, this is done with the help of a debt settlement agency or you can do it on your own as well.
How debt settlement works?
We will discuss the process using a debt settlement agency where it will perform the role of a mediator between you and the creditor.
The process starts when you contact a debt settlement company and register yourself in the program. After this, the agency will have two major responsibilities – first to make your financial status look distressed so that your creditor will get ready to settle and secondly, creating a lump sum amount that will increase the chances of the creditor to approve the settlement.
In order to fulfill the first task, the debt settlement agency will ask you to stop making the payments to your creditor. This action will send a signal to your creditor that you are not in a position to make the full payment. Well theoretically, this will make your creditor more desperate and willing to settle the debt. While the process is going on, there are chances you will be asked to deposit some amount to your settlement agency. This is done in order to create lump sum.
When should you go for debt settlement?
When you have a pile up of unsecured outstanding balances, opting for debt settlement can be a right move. You should also opt for debt settlement when you are behind on your payments for a maximum of six months and you are not in a position to repay your bills. You will be able to repay your debts only when the balances are trimmed down. This process is also an alternative to filing for bankruptcy.
Is debt settlement legal?
It is a legal way of paying off your debts; in fact, it is one of the preferred ways of paying off debts. Various debt settlement companies have helped the people to get out of debt and lead a debt-free life.
Should you settle your debt on your own?
Should you take the services of a debt settlement company or you should do it on your own? While you are the one who can answer this question, there are some things you need to ask yourself before you go ahead and make a final decision. Firstly, do you have immaculate negotiating skills so that you can easily convince your creditor to settle for less than what you actually owe? Secondly, do you feel comfortable signing a variety of documents? Thirdly, do you have enough amount in order to take care of debt settlement? If you have the reply in affirmation for all these questions, then you can go ahead with debt settlement on a DIY basis.
How to judge a scam debt settlement company?
Alas, the debt settlement business has various scam companies as well. Such companies will call you repeatedly and try to convince you to hire their services. These companies will not share their name and office address, they will ask you to pay them upfront, which is completely against the law. They will also go ahead and make false claims of getting you out of debt no matter how much amount you owe.
How to identify a genuine debt settlement company?
Like we have discussed the existence of various fake companies above, there are few things you should be familiar with so that you can differentiate between a genuine and fake debt settlement company. In the case of a fake company, they will ask you for an amount up front.
On the other hand, a genuine company will ask for the payments once they have settled your debts completely. Such company will also give you a written agreement in which they will be mentioning the exact amount they will be charging and when they will be charging that particular amount. These agencies or companies will also belong to the well-known organizations such as Better Business Bureau (BBB) and US Chamber of Commerce. The company should have a rating from BBB and should belong to American Fair Credit Council and International Association of Professional Debt Arbitrators.
What are the benefits of hiring a debt settlement company?
There are various benefits of hiring a debt settlement company, let us get familiar with them –
Setting debt in 4 years rather than up to 9 years
If you are opting for credit counseling, you will end up wasting 9 years to get rid of your debt. With a professional debt settlement company, you will pay off your debt in 1/3 the time.
Lowering the interest rates
When you settle your loans, it actually means you are paying a much lower interest rate on your debt. This will help save you money as well.
Lowering your owed amount
Rebuilding your credit score
Make sure you are aware of the significance of credit score and why it should be maintained. If you have a good credit score, it will help you in having larger loans, have better interest rates on your credit cards, and increase your credit limits. It’s not hard to maintain a high credit score, but if you are constantly missing your payments and you have too much debt then your score can plunge way down below.
Using a debt settlement company to remove all your debts will look good on credit reporting and helps in improving your credit score as well. When you have single debt source, it is much easier to meet the payments and to show the creditors that you are actually interested in paying off your debt.
What is a debt settlement letter?
A debt settlement letter is usually sent to the creditor or your collection agency. Using this letter, you will make a proposal towards credit card debt relief and inform the credits you are interested in making repayment for the debt. But, you will make monthly payments instead of making one full payment.
What is included in the debt settlement letter?
Now, that you are familiar with what is a debt settlement letter, let us discuss what you should write in the letter –
Your personal details come at the top that will include – complete name, complete address, and contact number. In addition to, you need to mention your account number also. If you are not aware of the right formatting, you can always refer the style manual.
The settlement letter will also have information about your finances. This will also help you in justifying your incapability to make the payments on your debt. Make sure you have attached all the supporting documents.
Here, you will have to mention the settlement request including the amount you want to be forgiven.
Reporting of the settlement
The last section will cover the whole process of how the settlement gets forwarded to the credit agencies. Ensure that you request your creditor or debt collection agency that you have made the full payment and negative entries should be removed from the credit file. It is important for the creditor to give a reply in writing.