Debt Settlement Pros and Cons
The big question, is debt settlement a viable option? The answer is, it depends on your situation.
Just like with everything else, there are many debt settlement pros and cons. With a solution like debt settlement you must be educated before making your decision. Read below to find out if debt settlement is the right option for you!
How Debt Settlement Works
Debt settlement is also known as debt reduction, debt negotiation, or debt resolution. This is where a past debt is negotiated for less than owned and paid in a lump sum amount. Generally, the amount reduced is by half or more of the total, but these results can vary depending on circumstances.
When all sides have agreed, the negotiated settlement terms are then put in a contract. The debtor makes one lump-sum payment in exchange for the creditor agreeing that the debt is paid in full, and the account is then closed.
However, some settlements are paid out over a few months. In either case, as long as the debtor pays per the agreement in the negotiation plan, no outstanding debt will appear on the debtor’s credit report.
Debt Settlement Pros and Cons
For so many of us, having that peace of mind regarding your financial situation is what a lot of the debt settlement companies can offer. Knowing that you have someone on your side every step of the way can help in the success of your debt settlement arrangements. It is worth it to have a team of experts working meticulously to help you regain financial freedom.
Debt Settlement Pros
- Lower your debt amount
- Most debt settlement companies have settlement packages that bulk together the debtor’s negotiated amounts to settle with the creditor for 15% – 60% less than the existing balances. Then there are debt settlement companies that can settle for up to 70% because they negotiate your individual balances with more attention and detail. The debt settlement companies work hard to develop and maintain relationships with the creditors to come to a settlement agreement on your behalf.
- Works with you to protect you against creditors
- Debt settlement companies negotiate with your creditors on your behalf, taking the stress away from you. This will also help stop debt collection calls.
- Good settlement companies will arrange monthly update calls, establish a plan where the debtor can miss a payment or two, or finish the program six months earlier if consistent with all monthly payments. One thing is for sure; a debt settlement plan may help you pay off your debt for much less than what you owe. We can show you how – just ask us.
- Helps avoid bankruptcy
- Debt settlement often helps you avoid eventual collections or filing for bankruptcy. A creditor would much rather settle for less than you owe, rather than take a chance on you filing for chapter 7 bankruptcy and not getting paid anything at all.
- Debt settlement could prevent future lawsuits and court judgments.
- While debt settlement does not guarantee you from not getting sued, most creditors do not want to deal with the cost and hassle of a lawsuit.
- Debt settlement lowers your monthly payment and frees up cash flow to plan for future financial goals.
- Debt settlement helps people lower the amount of debt they owe. This helps you pay off your debt quicker than other debt relief options.
Other benefits to keep in mind:
- Reduces overall interest rates through debt reduction
- Helps increase credit score
- Lowers your monthly payment
- Reduces or eliminates finance charges
- Approximately determines a goal when you will be debt-free
Debt Settlement Cons
- Debt settlement service fee
- Debt settlement companies will generally take a portion of the savings you have paid towards the forgiven debt as the fee for utilizing their services.
- Creditors may refuse settlement offers
- Creditors are not obligated to accept a settlement offer. This can make debt settlement a risky option. You typically have a 50/50 chance of your creditors accepting a settlement offer.
- However, creditors may make mistakes or violate your FDCPA rights and decide to settle for much less than you owe. Yes, we use the law to help gain more favorable results for our clients.
- Slight impact on Credit Score
- Your credit score may also be slightly impacted after the debt settlement process. However, it is temporary, and there should be significant increases to your credit score once you have successfully completed the debt settlement process.
- Saving up for a lump sum
- One of the cons of debt settlement is that most creditors require a lump sum when negotiating a settlement. This means that you are going to have to be disciplined enough to make consistent payments until the negotiated amount is saved. However, if you are working with a good debt settlement company, they will help you figure out how you can optimize your budget to save up faster.
Types of Debt Eligible for Debt Settlement
Typically, credit card debt and personal loans are the best candidates for debt settlement. These would have a better chance of recouping their money.
Debts that are Eligible:
- Credit card debt
- Auto repossession
- Personal loans
- Utility bills
- Mortgage repossessions balances
- Private student loans
- Apartment leases
- Cell phone bills
It is harder to negotiate agreements for medical debt and government loans (student loans). It is not impossible, but there are three stipulations that come with these debts that the average person may not realize.
- You typically pay 90% of the debt for settlements
- You have to be aware of any government forgiveness programs
- If you are behind on payments, you are required to complete a trial period before they reinstate you.
Considering Debt Settlement?
After having read this article on the pros and cons of debt settlement, you will have the information necessary to make the best possible decision in settling your debt. Debt settlement is a great alternative, let Roundleaf and our professionals help put together a plan that best fits your current financial needs and pay your debts today.
In addition to providing excellent services to our clients, we are passionate about focusing on educating consumers on how to manage their money best. Our experienced debt counselors can handle the settlements for you and, in most cases, help our clients become debt free in 24 to 48 months.
That’s the kind of commitment you deserve!