If you have overdue credit cards and personal loans, and you’re looking for some form of debt resolution, you’ve got a lot of options. I’ve covered many of these debt solutions before, but my favorite approach involves making a good old-fashioned commitment to yourself that you’ll spend less, maintain a budget and pay off debt as aggressively as possible (meaning: whatever you can afford, apply it to your outstanding obligations). Doing all these, coupled with sincere negotiations with your creditors that you’ll pay off what you owe can help you make a big dent on your financial situation. And before long, you may be pleasantly surprised at the significant progress you’ve made with handling your debt.
Get the debt monkey off your back by settling your debt?
As I’ve mentioned, there are a lot of options anyone can take to start getting rid of their debt: there’s debt negotiation, debt consolidation, debt counseling or debt settlement. Which path should you choose?
Different Ways To Resolve Debt
Remember that in finance, it pays to have a good financial record. With that in mind, here’s a quick rundown of the methods people employ to reduce their debt:
- Negotiating your debts with creditors may allow you to minimize the amount you have to pay back to these entities, but you’ll continue to be on a repayment schedule.
- Debt consolidation requires a possible loan with long term repayments. I believe that this is a good approach to take in some cases, especially when you’ve got good credit. Something as simple as transferring your credit card balances to 0% balance transfer cards can help — that is, if you’re able to apply for one these days. Or the oft-mentioned p2p lending sites such as Prosper or Lending Club can be the salvation of anyone who can get through their doors with a favorable credit score. If you’ve got a less than stellar score, then debt consolidation may be harder to afford.
- Debt counseling is a solution that lets you review your personal financial situation and works to develop a realistic approach to repayment.
- Debt settlement is a way to wipe out your outstanding debts. While debt settlement sounds highly tempting and viable because of the possibility of negotiating down your debt load, you should still consider the pros and cons before you make a final decision.
Debt Settlement Pros
What attracts a lot of people to debt settlement companies and debt relief programs? Well, who doesn’t want to get the “debt monkey off their back” as effectively as possible? With debt settlement arrangements, much of your outstanding debt is forgiven through negotiations. Here are the pros and positive reasons for formally settling your debt:
- You could be completely free of debt within 24 to 36 months so you can start to build your credit again;
- You may be able to satisfy your debts for far less than you actually owe, representing a typical savings of 50% to 60% or more;
- Some creditors may agree to re-age your accounts and bring them to a current status to boost your credit score right away;
- All unsecured debts and medical bills in excess of $1,000 can be included in debt settlement arrangements;
- You can protect your credit report from incurring negative marks after you make settlement arrangements with your creditors;
- In most instances, your settled debts will no longer be subject to legal action or collection pursuits, so you don’t have to worry about debt collectors hounding you;
- You have more disposable cash to pay for utilities, housing, insurance and food; this may also help you free up more funds that you can direct to carefully selected high yield savings accounts and discount brokerages.
Debt Settlement Cons
There’s no real easy way to release yourself from debt — there’s always a cost to dealing with a third party or company in the debt industry. Now that we’ve explored the good points of debt settlement, let’s review the cons and areas of concern:
- Debt settlement companies often charge you an upfront fee plus monthly fee, waiting to pay your creditors until enough money builds in your settlement account so you can proceed to settle;
- Negative marks continue to hit your credit report until settlement payments are started, so your credit can be impacted while the settlement company waits for money to build in your account;
- Even though you’ll only pay off a percentage of your outstanding debt, settlement companies charge you a percentage of the debts forgiven; so some of the money intended for creditors will instead find their way as payments to your settlement company for services rendered. So how much of your money are you simply rerouting to a different entity? Here’s where a cost/benefit analysis may prove valuable and may influence the decision you make.
- Debt settlement applies to unsecured loans only so it can’t be used to help you pay off a car loan, mortgage or other secure loan;
- Your forgiven debt won’t really be forgotten because you’ll owe taxes on it. In fact, the portion of the debt which is forgiven by your creditors will need to be reported as income. As you can see, there’s no escaping the “tax man”.
- Debts appear on your credit report as “settled” instead of “paid in full” unless the terms are clearly negotiated with creditors;
- Collectors can sell the remaining debt to another collection agency if your creditor does not send you a written notice as proof that your debt has been forgiven. You’ll need to keep a record of the outstanding debts you still owe. At any rate, you could probably better manage and keep track of your debts and finances with a tool like DebtGoal, YNAB (with 10% discount using our link) or Mint.com.
So is debt settlement for you? I think that each type of debt solution serves a certain market. What’s important is that you find the right solution for your particular situation. If your debt situation has become too unwieldy that you can no longer handle things on your own, then go ahead and explore debt counseling or other channels that are available to you. But make sure you are careful about the debt services and companies you deal with as this industry is vulnerable to abuse.
Debt settlement seems to be more of a last resort for those steeped in debt. It could be the solution to take if you want to avoid bankruptcy and are committed to developing a clear plan to start over with a clean slate.
{ 9 comments… read them below or add one }
Before I used an agency, I think it best to call your creditors and tell them your situation and ask what they can do to help you. At the end of the day, you made the decision to make the purchases. What I do not condone is the outrageous finance charges.
If they will not work with you, then it is time to go forward with another plan.
I am more inclined to try out debt settlement for the chief reason that life becomes much simpler and for some reason you wake up happier knowing that you don’t belong to a faceless heartless corporation that can and do whimsically change interest rates on you.
Whenever we deal with a company in the credit or debt industry, we need to be prepared for the costs. Unfortunately, if you’re ever remiss in dealing with your personal finances, you can expect to pay even more to fix the problem. Therefore, it’s always best to be on top of your finances before it gets to the point that it needs fixing. Also, DIY remedies are best and cheapest. If consumers just learned to stop spending so much and so impulsively, it would be a step in the right direction.
Awesome article!
I agree with KT. I’m settling my debts right now and I couldn’t be happier that someone else is dealing with the credit card companies. I’ve had my interest rates increased twice over the last year on two cards for missing one payment. They can pretty much do whatever they want, right? Not anymore! Going with a debt settlement company was the best decision I made with regards to my finances.
Oh, also, from what my debt settlement rep tells me, you don’t have to claim the settled debt difference as taxable income if you are considered “insolvent.” I’d say most people who can’t pay their minimum balance on their cards would be considered insolvent.
I think it’s important also to separate out the idea of debt settlement, from debt management plans. You can even do debt settlement yourself for free, by negotiating directly with creditors to see if they’ll accept less than the full amount if you pay off in a lump sum or very accelerated payments. Credit counselors will negotiate for you too, of course, for a percentage, as mentioned in the post.
A debt management plan can be a cash cow for credit counseling companies, so they have an incentive to push you into one whether it’s necessary or not. That’s where you get into making monthly payments to the credit repair company, which they then hold onto while negotiating with creditors, then begin disbursing while taking a percentage themselves.
Not that debt management plans are always bad. There are reasonably inexpensive, non-profit credit counselors who also offer debt management plans, if you like the discipline of having a place to send payments to each month, or if you’ve had no luck getting creditors to trust that you’ll make accelerated payments on your own.
Obviously, the best way to deal with this issue is to be responsible and not find yourself in this situation. If you do, however, honesty and integrity should be at the top of the heap. Be honest with your creditors when working out a payment plan, and make sure you don’t commit to something you can’t follow through. Some refinance their mortgage to “consolidate” the debt: remember, if you do this you will be paying off the debt for 30 years- not a good idea. Credit card companies are in a very competitive field- call them to negotiate your rate- it can be done. See my blog article, to bone up on what to do before you call… good luck!
Obviously, the best way to accord with this affair is to be amenable and not acquisition yourself in this situation. If you do, however, bluntness and candor should be at the top of the heap. Be honest with your creditors back alive out a acquittal plan, and accomplish abiding you don’t accomplish to article you can’t chase through. Some refinance their mortgage to “consolidate” the debt: remember, if you do this you will be advantageous off the debt for 30 years- not an acceptable idea.
Debt settlement can save someone thousands of dollars throughout their loan and can pay off that debt in as little as 2 years with lower payments. This does however hurt your credit, because you have to be behind on your bills or show some sort of hardship in your life for your creditor to settle your debt. This is not a program for everyone, but it does make sense for the majority of people in our country and also because of the state our economy is in.
Even MSNBC reports that in many cases, debt settlement does make sense. We in the industry tend to agree.