Settle a debt may be an option if you cannot repay your debts. You can settle your debt once and for all by paying a percentage in one lump-sum payment. As soon as the creditor or debt collector receives the payment, the account is closed, and the debt is discharged.
In addition to saving money, debt settlement is also an excellent way to get rid of badgering debt collectors and to give yourself a fresh start financially.
Personal finance experts, however, recommend that you try various payment methods before settling a debt. In the future, it may be more challenging to obtain a loan or a job if you resort to debt settlement.
However, it is essential to note that the consequences of debt settlement do not last forever. The debt will be able to be put behind you, and you will be able to start over. After settling the debt, you can apply the additional funds to other obligations or your retirement savings.
The purpose of this article is to provide an overview of the debt settlement process and explain how to calculate a fair settlement percentage.
How does debt settlement work?
A debt settlement involves the consumer agreeing to pay off a debt for a reduced amount. It is more likely that individuals experiencing financial hardship can settle their debts.
Your creditors will likely contact you if you suddenly stop paying your monthly debt obligations. You may receive telephone calls, emails, and letters from them. If a person does not resume payments, their credit score will decrease. Your creditor may charge off your account and sell it to a collection agency at some point.
You will be more willing to settle with your creditor or a debt collection agency if you stop making payments for a significant period (usually over a year). As part of debt settlement, you make a one-time payment, and the creditor agrees to wipe off the remaining balance of your account.
Credit can be affected by debt settlement
In most cases, debt settlement does not negatively impact your credit score. However, a debt settlement does not affect the time leading up to it. It is common for consumers to stop paying their bills when they intend to settle their debts. The creditor continues to report non-payments as the months pass, resulting in a reduced credit score.
When a creditor sells your account to a collection agency, the agency will likely report your debt to the credit bureaus. If they do so, your credit score will be adversely affected.
One lousy debt can damage your credit score by 160 points or more due to missed payments and dealings with debt collection agencies.
Collection agencies and your original creditor will cease to issue adverse reports once you settle the debt. The credit score of your account will gradually increase over time. Additionally, you will be freed from harassing telephone calls and debt collection letters.
Is it possible for me to handle debt settlement on my own?
It is possible to handle debt settlement entirely on your own. There is no need to hire a debt settlement company.
Nevertheless, if you decide to handle the process yourself, you should do so methodically and with as much information as possible.
First, you should identify the debts you wish to settle. You can have a single old obligation or multiple debts. It is also necessary to determine how much you owe for each debt and where it is in the collection process.
In general, older debts are easier to settle. The statute of limitations for your state may have expired if you have not paid a debt for two or three years. As a result, your creditor will not be able to sue you for the past due amount and may be more willing to settle the debt with you.
To settle the balances of your accounts each month, you should evaluate the total amount of your obligations.
Take the example of a consumer who hopes to settle three debts.
For example, Jennifer owes three separate debts of $2K and has yet to make any payments for two years. Debt collectors have purchased these debts from the original creditor even though the statute of limitations hasn’t expired. She has $3,500 in savings to settle the debts owned by the same collection agency. When she contacts the agency, she lets them know she wants to set up a payment plan or settle the debt entirely. Jennifer offers $2,000 to settle all three debts – approximately 33% of the total. The debt collection agency determines that the offer needs to be higher. They instead counter a bid of $3,000. Jennifer immediately makes a $3,000 payment after she agrees. She receives a notice of settlement from the debt collection agency. The adverse credit reporting stops, and Jennifer is released from her obligations.
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Debt settlement can be challenging, however. There are times when debt collectors would prefer to accept higher settlement offers. It is, therefore, helpful to have a fair amount in mind when negotiating with a debt collector.
What factors affect settlement amounts?
Several factors influence the amount you offer to settle your debt, including:
- The date on which you last made a payment toward your obligation
- The total amount owed
- Your account may be with the original creditor or a collection agency
- What you can afford
Your creditors are likely to accept a smaller payment if your debt is older and you last made payments a while ago.
The value of your debt is also considered when negotiating debt settlement offers. When a debt exceeds $500, collection agencies may be less willing to accept a small compensation.
Your original creditor may also reject a low settlement offer. The creditor may take you to court if your debt still needs to pass the statute of limitations and they have proof that you owe the money.
Lastly, you can only settle a debt with a creditor with the funds. You can’t pay a debt with little savings with a settlement offer. Rather than setting up a payment plan, try setting one up.
For a debt collector, what amount should I offer?
The first step in any negotiation with your creditor or a debt collection agency should be to start small. Ideally, you should anticipate that the collections agency will present you with a counteroffer, and you should have enough room to accommodate their demands.
You can offer lower interest rates if your debt is older. Consider how much money you have available to pay the obligation. Choosing a settlement may only be the best option if you have enough savings to settle your debt.
It would help if you started by setting aside 25% of your debt’s value. The debt collection agency will likely try to double the settlement amount. Most obligations settle between 30% and 50% of their original value.
You may negotiate a payment plan with the debt collection agency if they are unwilling to accept a settlement. With a payment plan, you won’t have to pay large sums of money all at once, keeping you out of court.
Do I need a debt settlement agency?
Debt consolidation and settlement agencies often handle negotiations with creditors and collectors on your behalf. It is possible to reduce your debt by 50% or more with some of these programs.
Every debt settlement agency, however, charges a fee. You may have to pay a fee of up to 30% of the total amount of your debt. When you pay fees like that, you may only save 20% overall, even if the agency reduces your debts by half.
Following a specific program when dealing with debt settlement agencies is necessary. Typically, you will make monthly payments which they will deposit into a savings account on your behalf. Upon accumulating sufficient funds, they will negotiate with your creditors one by one to settle your debts. The duration of a program may range from two to four years.
In many cases, debt settlement agencies won’t work with people who don’t have multiple accounts to settle or who owe less than $10K.
In the case of a few low-value accounts, you’re better off handling the settlement process yourself. The best way to avoid future hassles is to pay them off immediately if you have the money to do so.
The debt collectors don’t need to accept your offer
There is no obligation on the part of a debt collector to accept your offer. They may refuse to do so if they believe they can collect more from you through other means. Your proposal may also need to be considered higher by debt collectors.
Try setting up a payment plan if a debt collector refuses to accept your offer. As you make monthly payments, build up your savings and attempt a new settlement offer in a few months.
Creditors may be more willing to accept your offer as time passes, especially if you can offer them more money.