What is a Debt Settlement Program?
If you are like the majority of Americans, debt can sneak up on you seemingly out of nowhere. From student loan debt, to credit card debt, it is often a struggle to pay off for many. The overwhelming feeling that takes hold sometimes seems impossible to shake.
Many people get so stressed and burdened by debt collection calls, and constantly struggling to make ends meet, that they often ignore the debt because there seems to be no other option. However, there are debt relief options. Debt Settlement programs have helped many get out of their current debt and learn how to manage their money more effectively to stay debt-free.
These life situations lead to financial strain:
- Job loss or reduced working hours
- Major medical emergencies
- Lack of income while opening a small business or transitioning to self-employment
- Going back to school
How Can A Debt Settlement Program Help You?
If you are ready to make a change without filing bankruptcy, stop the harassing calls, and pay off your total debts a bit quicker than you otherwise would, a debt settlement program may be the answer. This debt relief program often helps you get out of debt for less than you actually owe.
A debt settlement program is typically an assisted program for debt relief. A debt settlement program will work with you to help you find ways to save money to offer the creditors a lump sum payout to settle your debt for less than you owe. Once the agreed amount is paid per the agreement, the creditor or debt collector will remove the remaining balance and your account will then be determined paid in full.
How a debt settlement program works
Because debt settlement companies cannot charge a fee until the minimum of one settlement is negotiated on your behalf, you must work with the settlement company closely to be successful. Typically, there are a few steps you will need to take before starting the debt settlement program.
Debt Discovery and Evaluation
Usually this program starts with the discovery phase. During this initial first interaction, you will explain your situation, your debts, and your income. During this period, your debt settlement company will help you determine if you are a good candidate for the debt settlement program. They will run a credit report for a clear picture of your financial situation.
If you decide to proceed with the debt settlement program, you and your financial counselor will determine what debts you should include in the settlement program. While you do not have to include all of your debts, you should be ready to list the main ones that are either delinquent, in charge-off, or collections. Keep in mind, you should eliminate your current debt or accounts that you would want to use in the future.
Types of debt you can include in a debt settlement program
- All-purpose credit cards
- Store credit cards
- Collection accounts – charge off unsecured accounts, utilities, car repossessions, and personal loans
- Unpaid or charged-off medical bills
How to pay creditors
For most people, if you had a lump sum of money, you probably would not be behind on your accounts. The debt settlement program helps you find ways to save money to acquire the funds you need to make the settlement offer. Typically this means setting up an escrow account where funds are deposited until you have the amount needed.
Programs like Roundleaf Inc. will help you find ways to save money, trim off excessive spending, and even find debts that can be eliminated for the time being to allow you to save the money you need. The goal is to come up with the funds as quickly as possible to help you get on a budget that aligns with your financial situation. Most generally, a budget is to help you set a monthly amount aside that will go towards the negotiated settlement offer.
Settling with creditors
Once you have the funds, the debt settlement company will call your creditors to finalize the negotiated amount. Negotiating the debt often begins once all the funds are together. Generally, the settlement amount is much lower than the total amount you owe, and it is our goal to get the lowest amount possible.
Once the creditor agrees, the funds are distributed to one or all of the creditors.
Time to make a plan for debt recovery
Once each debt is paid, the creditor should report that it is paid as agreed to all credit bureaus. Credit and collections accounts can stay on your credit report for seven years. While it may sound scary that this notation stays on your account for seven years, keep in mind that the negative impact is not near as severe as if you had unpaid collections or charge-offs.
Now that your debt is settled, you can start working on a credit recovery plan to begin rebuilding your credit. Roundleaf Inc. will help you make a budget for future financial goals and share resources on how to re-establish and rebuild your credit. Credit monitoring is a must to make sure that your credit is repaired.
Who qualifies for a debt settlement program?
While almost anyone can qualify for a debt settlement program if their accounts are delinquent, in charge-off, or collections, there is a specific time to enroll in a debt settlement program and when it will work the best.
A debt settlement offer is often most successful when debts are behind, but have not made it to collections or charged off. Or, if you know you are in a financial situation that you cannot recover from, debt settlement often helps you avoid eventual collections or even filing for bankruptcy.
A creditor would much rather settle for less than you owe, rather than take a chance on you filing Chapter 7 bankruptcy and not getting paid anything at all.
Debt settlement risks and benefits
Just like anything in life, especially financial decisions, debt settlement has pros and cons. While it sounds good to settle debt, there are specific risks that you will need to weigh out to see if this program is the best program for you.
The main risks are:
Saving is often tough
- One of the main cons is that you are typically required to put money into a special savings or escrow account. This money could sit there for at least 36 months or more. This means that you are going to have to be disciplined enough to make consistent payments until the negotiated amount is saved. The mental process of allowing money to sit in savings and not touch it is often too much to bear, and many people drop out of the program.
- The pro to depositing money in an exclusive account is that you are saving up for a financial goal. Your budget is allowing you to set aside the monthly payment, and you will soon be debt-free.
Incurring debt to pay off debt
- When you enroll in a debt settlement program, it is not uncommon for you to be encouraged to stop sending payments directly to your creditors. When you stop payments, your credit is then negatively affected even more, and late fees and penalties rise. Creditor and debt collector calls may even start requesting payments, or even worse, lawsuits and garnishment of wages.
- On the flip side, not making the payments for a short time enables you to pay on other more critical debt that affects your credit and financial goals more significantly. Roundleaf Inc. will help you determine which accounts are more important to focus on. Remember, the end goal is to pave the road for a debt-free life, and sometimes this negative impact is less than your current situation.
Creditors can refuse settlement offers
- Because creditors are not obligated to agree to a negotiated amount, your chance is a 50/50 that they will accept. This is the highest risk of debt settlement. But, the good thing is, if they do not agree to the settlement offer, you at least have some cash to pay towards that bill or other bills.
The main benefits besides the ones listed above are:
- Stops debt collection calls
- 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
- Helps avoid bankruptcy
- Offers credit counseling
- You do not have to do the debt negotiation
There are many debt settlement programs out there. Be careful that you do not end up in a debt relief scam. Remember, the program is only as good as the effort you put in, and the company that negotiates for you.
Roundleaf Inc. has your best interest at heart and will never advise you to do something illegal or unethical. While we are not a credit counseling agency, we do have a credit counselor that can help educate you. Our resources and education programs teach you the many ways you can work with your credit card company or other unsecured debt to help you through the debt management process.
Let us give you a free debt management evaluation and find a financial solution that works for you.