Debt Settlement
The Allure of Debt Settlement
“Debt settlement” sounds so positive all by itself. Who wouldn’t want to settle their debt if they could? It certainly seems much calmer than “drowning in debt” or being “overwhelmed by debt.” Finally, things might calm. You know… settled.
“Debt settlement” actually has a very specific connotation when it comes to personal or small business finances. It means that one or more creditors have agreed to settling debt for less than owed in order to close out your account and move on. It means you can’t or won’t pay, and that your circumstances don’t look likely to change anytime soon. It’s a compromise of last resort. Without it, you’re heading into bankruptcy or other legal proceedings. Your debt settlement negotiation may not be accompanied by literal wailing and gnashing of teeth or require actual sackcloth and ashes, but it might as well.
If you’re getting serious about debt settlement, things haven’t gone well. At all. Even a little.
Advantages and Disadvantages of Debt Settlement
Because debt settlement is generally a last resort before filing for bankruptcy, it’s probably not surprising that there aren’t a lot of advantages to discuss. Avoiding bankruptcy might be counted as a plus, but depending on your circumstances, filing Chapter 7 or Chapter 13 bankruptcy is sometimes a better plan and gives you more of a foundation for recovery and pushing forward. Successful debt settlement does mean an end to harassing phone calls and other collection efforts – that’s a definite plus. Whatever the specific agreement reached, upon debt settlement, the debt is considered closed, if not technically “paid in full.”
Debt settlement is preferable to simply not answering the phone or leaving the house and hoping it all magically goes away. (It turns out that doesn’t actually work as often as one might hope.) If after weighing your options and exploring less dramatic solutions, you decide that your best shot at debt resolution means initiating debt settlement negotiation, then that’s what you do. No fear, and no looking back. We’ll do everything we can to support you during the process.
The disadvantages, on the other hand, are legion. The process itself takes a very long time – usually three or four years. During that time, you’re encouraged to stop paying the debts in question altogether in order to (a) motivate creditors to settle and (b) build up sufficient savings that you can offer a lump sum of some sort to make it worth their while to negotiate. If creditors believe there’s any chance you could continue paying on your debt even partially, they’re far less likely to consider accepting a lower amount. If they do negotiate, they’re unlikely to be interested in potential partial payments at this point – thus the need for a lump sum.
Needless to say, this process destroys your credit history and credit score, both of which are heavily predicated on your history of making reliable payments. That means even after you settle debt with as many lenders as possible, it could be years before you’ll have reliable access to financing on any terms. When you are eventually offered credit, expect high interest rates and more upfront fees.
Finally, just to add a little salt to the wound, any debt wiped out as part of this sort of debt resolution is considered taxable income by the IRS and must be claimed as such. Given that your circumstances are probably less than idea if you’re working your way through negotiated debt settlement, this extra bit of hurt should be taken into account before making your final decision about settling debt for less than owed, no matter who the creditors may be.
+ Which Debts Are Eligible for Debt Settlement?
As you might imagine, debt settlement is unlikely to be seriously considered for any secured debt – a mortgage, a car payment, etc. If your creditor has a choice between accepting partial payment or simply taking ownership of the property in question, they’ll generally choose the latter. Most debt settlement programs focus on settling credit card debt, settling medical debt, and personal loan debt settlement. Even if you’re negotiating as an individual, you’ll soon realize why.
What do credit card debt settlement, payday loan settlement, personal loan debt settlement and the like all have in common? Several things. They’re all unsecured – there’s no collateral to claim if you default. Credit cards and payday loans tend to be high interest vehicles, and personal loans can be, depending on your credit score at the time. Lenders charge more because extending this sort of credit carries a higher risk and they know from time to time they’ll be unable to collect some or all of what’s owed. Like in this situation, for example.
Another thing they have in common is how they’re treated in typical bankruptcy proceedings. These sorts of unsecured debts are more likely to be “forgiven” in part or whole when bankruptcy occurs. That means you’re somewhat more likely to have success settling credit card debt, settling medical debt, or reaching debt resolution and similar unsecured debts through debt settlement negotiation because the creditor knows if you end up filing bankruptcy, their chances of getting much – if anything – are slim. The folks financing your vehicle or home aren’t quite as worried, since they have a little more leverage.
Student loans are a category unto themselves when it comes to debt settlement. Because they often come wrapped in so many federal rules and regulations, you’ll want to negotiate student loan settlement separately and treat them as a unique case. On the other hand, if you used personal resources or personal loans to pay for school in the first place, or you’ve replaced your federally-backed loans with a debt consolidation loan of some sort along the way, that’s another story. For debt settlement purposes, these are just unsecured personal loans and can be treated as such.
+ What About Top Debt Settlement Companies?
The best debt settlement companies will be transparent up front about their fees and services. Legitimate debt settlement professionals won’t overpromise or make the process sound easier than it is. Their primary debt service is twofold – they (a) guide and advise you through the process and help you stay the course during the years it takes to reach resolution, and (b) negotiate with creditors in hopes of reducing how much you owe.
Technically these are things you can do yourself, but the top debt settlement companies promote their experience and insights as useful allies. Perhaps, but you’re nevertheless perfectly capable of setting up a separate savings account into which you pour the majority of your monthly income and waiting it out for a few years. It may be emotionally exhausting and spiritually draining, but the process itself isn’t complicated. Don’t answer the phone. Don’t respond to the letters. Don’t pay creditors until you’re ready to negotiate. Don’t argue with them about it.
If it’s worth thousands of dollars to you for someone else to not do those things for you, that is, of course, your prerogative.
If you choose to utilize any of the top debt settlement companies, they’re not legally allowed to charge you fees up front. Like the lawyers you see on TV organizing class action lawsuits or asking if you’ve been injured at work or in a car accident, their payment is contingent on resolution of your debt. Because of this, they tend to ask hefty dollar amounts or high percentages of the totals involved. These numbers can sound pretty good to desperate individuals, especially compared to their fear that things could be even worse without professional help. Still by the time the math is all said and done, even the best debt settlement companies tend to make more for themselves than you save by using them.
That doesn’t mean it’s always the wrong option, but don’t let your desperation lead you from your current frying pan into the proverbial fire. In other words, you always have options. Pay attention to what you’re being told and read the small print – both literally and figuratively. You can’t make things better by making them worse.
+ What About Debt Consolidation?
If you haven’t considered the possibility of debt consolidation – or even if you have – it’s certainly worth looking into before taking the dramatic step of signing up with debt settlement programs or negotiating debt settlement on your own. If you’re not familiar with debt consolidation, here’s how it works:
You total up the total amount you owe – credit cards, medical bills, legal expenses, vehicles, your brother-in-law, etc. Spend some time with your budget and determine what you could realistically devote towards debt reduction each month if you weren’t overwhelmed by debt and you could focus the majority of your disposable income on paying down debt quickly.
Now you select several lenders to approach. It never hurts to start with your local bank or credit union, especially if you already have a relationship with them like a checking or savings account. Be transparent about your situation and bring your numbers with you. They’ll want some indication that you have a realistic plan for repayment before they’re likely to consider this sort of debt consolidation personal loan. Be prepared to talk about your credit history and current credit score (which you of course should know before walking in) and to document your current income and expenses. Then see what they say.
Thanks to the wonders of the world wide web, lending is more competitive today than ever before. The days of dressing up in your Sunday best and waiting patiently for a chance to beg from a guy in a suit are gone. It’s actually a wonder they survived as long as they did. In what other realm is it your job to beg big business to choose you as a customer? They’re the ones making a profit off of your patronage; shouldn’t they be working to persuade you to accept them?
The explosion of alternative financing and online lenders has changed the game forever. Hundreds of institutions without the overhead of brick-and-mortar locations and able to serve the entire nation at once often offer competitive terms unimaginable a generation ago. And, while your credit score still matters, you might be surprised how flexible some of them are with situations just like yours. In any case, you won’t know until you give them a shot at winning you over.
The same numbers that make the market so competitive can be a bit daunting for those new to online financing. Where do you even begin? How can you distinguish the legitimate online lenders from those on shaky foundations, or the handful out there which are simply sketchy to begin with? That’s where we come in. Among our other services designed to unify personal and small business finance and simplify your world, we maintain a curated database of reputable online lenders, many of whom specialize in situations very much like yours. With a little basic information and zero obligation on your part, we’ll gladly hook you up with those we think most likely to meet your needs. What you decide to do with whatever they offer is always, of course, entirely up to you.
Meet Debtry. The Way to Manage Your Debt.
THE GOALRY UNIFIED FINANCE MALL
At Goalry, we have a rather lofty vision. We believe that most of us, if provided the right information, tools, opportunities, and connections, can take more effective control of our personal and small business finances. We believe that personal and small business finance may not always be easy, but it doesn’t have to be as hard as it often seems. We also believe that no one should have to figure it all out alone.
We’ll soon be rolling out our unified family of re-imagined financial apps and tools. Imagine the ability to categorize your spending, analyze your debt, or transfer funds as easily as you check social media or text your mom. How much easier would life be if you received alerts when payments would soon be coming due or you were about to exceed your own projected budget for the week? What if you could take all the data and information and expertise you know is out there and harness it to visualize the specific information you needed in the format that made the most sense to you in real time, when it was actually the most useful?
Technology should never make the decisions for you. What it can do, however, is give you the tools you need to make more informed decisions of your own.
You don’t have to tackle it all at once, but maybe it’s time to start taking back some of that control. Where would you like to start and how can we help?
Moving Forward After Debt Settlement, Debt Management, or Debt Consolidation
However dark things may seem right now, please know that you are not the first to find yourself in unpleasant financial straits, and you won’t be the last. It’s not always easy to juggle the many expectations and necessities of this broken world, but neither does it have to remain as hard as it’s sometimes seemed. And you shouldn’t have to do it alone.
We maintain what we like to think of as a “Unified Financial” Content Mall – nearly a dozen related sites built around our conviction that the average American is perfectly capable of taking more credit card debt settlement debt resolutionand insights, online tools and convenient financial applications, and the ability to connect with lenders or other financial professionals when necessary without feeling like they’re starting over from scratch every time.
