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Is Debt Settlement Worth It? Know The Risks

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Is debt settlement worth it

It is very important to keep in mind how falling behind in payments can have unfortunate consequences on your credit score. Even worse, you can be sued or lose the collateral if there is one.

If you feel debt settlement is worth it for you, start by evaluating all of your options. You have to consider the pros and cons of each one and the associated risks before committing to a solution.

We expect this article to be of great help in that regard and help you avoid some common pitfalls in this business.

Hopefully, you will consider debt settlement a tool in your toolbox without attaching any emotional value to it. This may sound strange, as thinking about our debt and our future can make us anxious and rush into decisions.

However, you ought to be objective and leave anxiety aside, even if creditors are pressing you.

Here’s a guide with things to consider when thinking about developing a debt settlement arrangement. Let’s get started!

What Is Debt Settlement?

Debt settlement involves negotiating pending debt with a creditor. Creditors pardon part of the debt through an agreement according to a payment plan within the debtor’s capabilities. If the debtor does what was written in the agreement, the creditor considers the matter resolved.

Although it sounds quite simple in principle, it is a strategy that should be well thought out. Before going for it, you should always ask yourself, “Is debt settlement worth it?”

What Needs To Be Considered Beforehand?

Let’s look at the factors to be considered and the information to be gathered before starting this process. First, you should know the terms and conditions of your debt, and you should also try to find out how your creditor handles debtors.

On your side of things, it is important to have a carefully written financial plan. This lets you see ahead and know the most convenient ways to restructure your debt, as well as your limitations.

We’ll go over some of your options in the following sections, so check which works best for your particular situation!

How Is Debt Settlement Done?

There are several ways you can attempt to settle your debt. First, you can try to do it yourself by following some guidelines. 

On the other hand, there’s also the possibility of finding someone who knows the business and can do it for you. This can be through a lawyer or a debt settlement firm.

When Should You Do It On Your Own?

You should consider doing debt settlement on your own if you have solid financial knowledge and your debt is not huge. 

This can be done by gathering information and try to come up with a proposal for your creditor to consider. 

Make sure you have a clear plan regarding your future incomes and obligations before you contact the lender. If there is a proposal, read it thoroughly so you know you can comply.

That being said, you should consider getting help from a professional if you lack the necessary knowledge.

Should You Hire a Lawyer?

Hiring a lawyer is always safer than trying to do it yourself, especially if you find a specialized lawyer. 

If your debt is somewhat large, you should definitely consider going this route. Their costs will likely be lower than debt settlement companies, and you can still see great results. 

However, these companies usually shine through their experience in this matter. These services are also easier to check online for scams and the like.

These professionals will also be able to let you know if there is another option for you. Let’s face it; there are situations so bad that warrant declaring bankruptcy. This might not be your case, but a lawyer will be able to provide you with the best strategy.

Should You Hire a Debt Settlement Company?

If you are having a rough time regarding your money, debt settlement can sound like a lifesaver.

However, this is not always a blissful experience. You have to study the pros and cons carefully. This is especially true as some of these deals can be deceiving or have unexpected lasting consequences.

As with any other company, debt settlement companies focus on efficiency. They can analyze your case through people who feel comfortable with the details by having seen similar ones in the past.

If your debt is to some big lender, they probably know what kind of offers they prefer and accept. These companies must follow industry regulations that were made to protect consumers.

Still, it is important to see what your options are when going down this road. Try to verify the offering company and ask about all the costs involved.

Thoroughly inform yourself about their strategy before agreeing to a deal. Sometimes those strategies involve halting future payments to the creditor, which they obviously won’t like.

To know if debt settlement is worth it for your situation, read on to learn about the risks associated with it.

What Are Some of the Risks Involved With Debt Settlement?

As we said before, debt settlement is not a one-size-fits-all solution. This is because there are several risks you will incur when accepting it, and you should carefully consider them and weigh them in with the pros. After all, this is the only way to know debt settlement is worth it for you. Let’s take a look at these risks.

It Can Hurt Your Credit Score

Settling your debt will leave a mark on your credit score, and it is going to appear in your credit report. Especially since debt settlement companies tend to push clients into holding off payment to the creditor.

Low credit score

Remember that debtors are considered delinquent as soon as they miss a payment. As this delinquency grows, interests accumulate, and creditors use different resources to claim their payment. This includes litigation in many cases.

Consider that delinquencies, accounts sent to collections, and charge-offs will remain visible in your credit report for up to seven years. These will probably still appear even if you settle the debt.

It Can Increase Your Total Debt

Ask about the expected timetable and the difficulty of your case. Often, debt settlement companies recommend clients stop making payments until the matter is solved.

The settlement process can take several years, so consider how those months of unpaid debt can accumulate. Creditors can torment you and even sue you during that time, which will only add to your troubles.

It Can Produce Aggregated Interests

You should also consider that interests will probably accumulate on your debt. This can mean your total debt can grow quite large if the creditor doesn’t want to settle. This number can grow large and make you lose even more money after all.

Taxes Are a Concern

Learn how the forgiven debt can be taxable! This is utterly important for your budget planning. The IRS considers forgiven debt taxable when it exceeds $600, so if you get a settlement, consider possible taxes on the pardoned amount.

How Should You Compare Debt Settlement Firms?

So, you have decided that debt settlement might be worth it in your case and go with a firm. But, how do you choose a debt settlement firm? Well, there are certain factors you can consider. By comparing them between firms, you will get a better grasp of which one works for you.

Financial Considerations

One of the most important factors to consider is the repayment period the debt settler asks for. These are often from 12 to 48 months but can vary. However, some of these firms also have a minimum debt that is acceptable, so check that first.

tax calculation setup

Try to find a service that offers budget counseling or savings and debt management classes. You should also try to connect with organizations that offer free information instead of charging for it. Ask if they will help you solve your long-term budget problems.

Perhaps more importantly, have the representative explain in detail which fees can be charged. There are several organizations that can help you with counseling even if you can’t afford to pay fees. Debt settling is about getting your finances in order, after all.

As such, talk to the organization’s representatives regarding additional charges and fees from creditors. Sometimes these can be waived or reduced.

Make the Deal Clear

Take as many times as you need to understand what the debt management plan involves.

Of course, ask them for a written offer before you commit to anything. Make sure you read the offer in detail and agree with every item. You should be entirely certain you understand what you are getting into.

Ask how often you will receive status reports on your accounts. This includes asking through which means you can check it and whether it is by phone or online. Being able to check in real-time or at least obtain regular updates on your status is essential.

Lastly, demand that they inform you if there’s any debt not covered by the debt management plan. If there is, make sure to include it in your budget planning.

Can You Trust This Particular Organization?

You can also solicit them to present qualifications and research about what type of training they give to their counselors. It’s often better if counselors are trained by a party not related to the company.

Request information on whether the organization is licensed to operate in your state.

Be careful if someone claims to delete negative reports in your credit history. That cannot be done legally. Remember, this type of information can stay in your credit report for up to seven years.

Are They Biased Towards Some Specific Deal Type?

One way to find out is to ask if their employees receive bonuses tied to your fees or hiring of a particular offer. Some of these organizations will tend to make you wait as their profits grow larger. This can cost you dearly.

Make Sure Your Information Is Secure

Ask them about their policies regarding client information. Many organizations sell this data to third parties for huge profits or fail to secure it from hackers and the like. You can ask what type of standards they follow for this purpose.

What Are the Alternatives?

With so many ways of lending money available, there is a possibility that you can move your debt to a different creditor. Your first thought may be this does not sound responsible. However, if you find you can’t afford to pay your obligations, this is certainly something to consider.

Sometimes this can help you get more time or pay lower interest rates. This is definitely a good option that can save you from having stains on your credit report.

Balance Transfers

If you have credit card debts, one possibility is to get another credit card and do a balance transfer. In fact, we have covered several cards perfect for this purpose in this guide.

Some cards have a 0% balance transfer APR for a set amount of months, which can buy you some time. Of course, you have to consider all factors to include this in your financial plan.

Some questions you can ask yourself are:

  • How long does this intro APR last?
  • How much is the APR after the introductory period ends?    
  • What kind of annual fees does this card have?   
  • Does this card charge balance transfer fees?

Line of Credit

This method gives you access to a determined amount of money you can borrow and repay later. The size of that amount is tied to factors such as your credit score and income. You will often pay interest according to the borrowed amount, not the total limit.

More often than not, collateral such as a vehicle or house is not required. These are called unsecured lines of credit. 

In the case of secured lines of credit, one of your assets must be registered. This allows the lender to claim that asset if you fail to pay back the loan. Secured lines of credit often present the benefit of lower interest rates.

One thing to consider is that you need to have a good credit score, often 620 or more.

A line of credit is a nice option, especially if you have some uncertainty regarding future incomes or expenses. This is thanks to its flexibility.

As always, evaluate the proposal in-depth, which involves reading the terms and conditions carefully. If you don’t agree with something, discuss it with the lender or don’t accept the credit line.

Debt Consolidation Loan

These loans are another solid option to consider. Although they often require you to have a good credit score, their APR can be quite nice sometimes.

Many companies are providing this service, often allowing you to repay your debt through several years. The act of getting one of these loans will not hurt your credit score provided you pay it back according to your agreement.

Family and Friends

Hopefully, you will never get to this option as you probably prefer not to bother your family. Still, it’s the one that is most likely to save you from fees and interest rates. This might put you in an uncomfortable position, but it is an alternative everyone should consider.

Other Useful Resources

Visit the Consumer Financial Protection Bureau (CFPB) to learn more about how to operate with different types of lending. This US government agency was created to protect consumers from unfair treatment.

The Better Business Bureau (BBB) is an organization that keeps track of businesses and their reputation. It’s not a bad idea to search the offeror to see what previous clients have to say.

Conclusion

In this article, we have gone over a large set of options available to you. Think if you can create a mix from several of them if it serves you better. Maybe a combination of two or more of these tools makes for the easiest way out of your debt.

However, beware of magical offerings and consider all factors mentioned here. Regardless of what kind of solution you come up with, think it through carefully.

As always, try to have a clear sense of how your finances will look in the future to avoid falling into unnecessary delinquency.

In order to decrease your debt, keep making payments to your creditor whenever possible until an agreement is reached.

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