Do you find yourself trapped in a debt trap you cannot escape? You may be making regular payments on obligations, but most of your costs go toward interest rather than principal on your loan. You may need help making regular payments and have little disposable income to save for retirement or put towards savings.
Debt settlement may be an option if you struggle with unmanageable debt. A debt settlement involves paying a lump-sum payment to your creditors for a lesser amount than the total amount you owe. By making the payment, your creditor agrees to clean your slate and cease further collection efforts.
You can settle your debt through various agencies handling the process. Most settlement agencies, however, charge a significant fee for their services of up to 25% of your total debt.
Using a debt settlement agency allows you to leave the debt settlement process in the hands of others. You will also likely spend more money than you would if you handled the matter yourself.
Consider negotiating directly with your creditors rather than entrusting your financial affairs to a debt settlement agency. There will be some time and effort involved, but you will likely save money and get out of debt more quickly if you follow this advice.
Summary: If your debts become overwhelming, you can negotiate a debt settlement with your creditors. Make a pause from your regular payments to save up enough to make a lump-sum payment. When you have saved approximately 75% of the debt value, contact your creditor with a proposal. Make sure to start low so that you have room to grow, and once you have reached an agreement, make sure you have everything in writing. Debt settlement may affect your credit score, but getting your financial life back on track is usually worth it.
What is the process of debt settlement?
Start the debt settlement process by listing the debts you wish to settle and their current balances.
Most debt settlement agencies recommend that you cease all payments to creditors with whom you intend to negotiate a settlement. Meanwhile, you will deposit all the money you usually pay into a savings account.
It is possible to stop all payments at once or to begin with just a few creditors. If you have multiple debts, containing just a few will allow you to maintain good standing with the rest of your lenders while you work on one or two creditors. Your creditors cannot file lawsuits against you if you continue to make payments to them.
Nevertheless, stopping payments to just one or two creditors may hinder your ability to save enough money for settlement. If you decide to stop just a few payments, consider diverting extra funds or earning more income to increase your savings.
When you have saved a minimum of 75% of the total value of your chosen account, you can begin negotiating.
Negotiate a debt settlement with your creditors
It’s time to send a settlement offer once you have at least 75% of the first debt you intend to settle.
The following can be said:
“I am offering you a lump-sum payment of $___ to settle my obligation with account number XXX. You can accept or counteroffer. If you accept, respond to this message with only ‘Accept.’ If you want to counteroffer, respond to this message with only ‘Counteroffer: [$___].’
Please do not contact me in any other way than by responding to this message. This offer expires in 6 days on MM/DD/YY. I will pay the agreed amount within 90 days of the settlement date.”
You should offer at least 60% of the total debt value. You might contribute $1,200 to settle a debt of $2,000 to a creditor.
It is best to have at least 75% of the value of the first debt available in your account in case you go through several rounds of negotiation with the creditor.
Be sure to abide by the terms of any agreement you have with your creditor. Get your deal in writing and pay them the money on or before the due date.
My first debt has been settled. Now what?
If you want to settle more than one debt, follow the same procedure. You can break free from debt sooner if you save money quickly.
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Debt settlement should be considered urgent, similar to ripping off a bandage. The majority of debt settlement programs last between two and five years. You may be able to complete your program earlier if you do not have to pay 25% of your debt to an agency.
Examine your household expenditures and identify areas where you can make reductions to save more money for debt repayment. Consider forgoing dining out or trade your new car for a used one for a while.
Consider taking on a part-time job if you are still looking for a way to save more money. It may seem exhausting to work a second job. Despite this, if you are willing to put in the effort, you will be able to eliminate your debt more rapidly.
Credit scores are affected by debt settlement
It is essential to know that debt settlement can negatively impact your credit score, especially if your debts are in collections. Once you have completed the settlement process, you will need to rebuild your credit to mitigate the problem.
Maintain one or two credit cards and repay them as usual. Avoid allowing them to go into collections. Although you may not save money, if you manage them properly, you will maintain a solid credit history that will help you increase your credit score.
Although debt settlement is not suitable for everyone, it is a much better alternative to bankruptcy. Bankruptcy appears on your credit report for up to ten years, which makes it challenging to obtain a new loan or purchase a home.
In contrast, late payments and collections remain on your credit report for seven years. You will, however, see your credit score increase sooner than you would with bankruptcy, as their importance will decline over the months following settlement.
In the future, it is recommended that you carefully manage your finances to avoid getting sucked into another debt trap. Minimize the use of debt as much as possible. As a result, you should build up your savings and rely on them in case of unexpected expenses.