Most people seeking debt settlement information have many of the same questions and concerns. Here is a list of the most frequently asked questions on this subject along with the answers you are looking for.
The process of settling debts involves a negotiation between a creditor and a consumer debtor (or the debtors representative). During the negotiation, the debtor (you) will offer your creditors a one time lump sum payment (usually around 50% of the total amount owed, sometimes less, sometimes more) in exchange for dismissing the debt.
First of all, just so you are aware, the terms debt negotiation and debt settlement are often used interchangeably, so don't be confused if you see one or the other used. Alright, let's answer the question...
The answer is it depends. It depends on things like...
However, most successful debt settlement programs last less than 36 months. And the quicker you can settle a debt the better. If you owe money to more than one creditor, then some of the settlements will take less time than others. In other words, not all of your debts will be settled at the same time. If a company tells you that their plan can take up to 5 years then I suggest you look elsewhere. Even 4 years is too long.
A good rule of thumb is to aim for 24 months but count on 36 months if you want to be successful. Once you go past this time frame your chances of success start to diminish rapidly.
Fees are either charged as a percentage of the total debt that you bring into the program, or as a percentage of the amount of debt that the settlement company saves you. Ideally you want to pay the bulk of the fees after the service has been performed and your debts have been settled.
How much you are required to save each month will depend on how much total debt you are trying to settle, how much money you have access to right now, and your goal in terms of how quickly you wish to have the debts settled. For example, if you have $24,000 of unsecured debts, you should aim to accumulate $12,000 in settlement funds. If you give yourself a 24 month time line, then you would have to save $500 per month on average to meet your goal.
One thing that you should be aware of is that in some instances the money that you save by settling your debt might be taxable. If you save more than $600 then your creditor will report this to the IRS as Discharge of Indebtedness Income. You should consult with an attorney to see if you qualify to avoid paying tax on this income. Typically if you were insolvent (debts outweigh assets) at the time of the settlement you do not have to pay the tax.
If you think that you can simply sign up for a settlement program and then sit back and let the company do all the work, you have been given bad debt settlement information. The reality is that you are the one who will be doing most of the "heavy lifting".
For starters you will need to prepare a detailed monthly budget that incorporates your new savings program. In fact, this alone is probably the most important part of any debt relief program. Your ability to manage your finances going forward, and save the money that you need to save each month will make or break you when it comes to completing the program. Remember, the debt negotiation company can only settle your accounts if you have funds available to do so.
On that note, if you do not think that it is possible for you to save the money required, then consider another debt relief option.
Once a settlement is reached with a creditor, you will be responsible for arranging payment as the settlement firm will not have control of your funds.
Although some people assume that their creditors will be contacted immediately and notified that you have enrolled in a debt settlement program, this is not necessarily the case. In fact in some instances it may be months before a creditor is contacted and provided with the debt settlement information to begin the negotiation process.
The "ultimate" goal is of course to get you out of debt. The "sub-goals" if you will are to get you out of debt for the least amount of money and in the shortest amount of time.