What A Debt Settlement Plan Can And Cannot Do For You

When it comes to avoiding bankruptcy, a debt settlement plan is your number one choice. Not only will it eliminate your debts, but you can typically achieve discounts on those debts of 50% or more. However, it should be noted that these plans are not "cure-alls" for your debt problems. Here's a quick look at how a debt settlement program works, what it can and cannot do, and who it is best suited for.

How A Debt Settlement Plan Works

The objective of a debt settlement plan is to eliminate your debts as quickly as possible. And for as little money as possible.

Sidebar: When I say as little money as possible I am not just referring to the settlement amount that you reach with your creditors. I am referring to the overall cost of the settlement which includes this amount plus the debt settlement fees charged by the debt relief company or lawyer that you hire.

When you enter a debt settlement plan you will stop paying your creditors (if you haven't already) and then begin negotiating with them to "settle" your account. If you don't feel comfortable doing the negotiating yourself, you can always hire a professional debt settlement company to work on your behalf (this is where the fees come in). This will certainly cost you more but it will be less stressful and you might end up with a bigger discount if you go through a professional.

While the debt negotiation process is underway, you will begin to deposit money into a separate savings account each month. This is the money that you will be using when the time comes and you reach an agreement with your creditor(s). Depending on the amount of your debts, and your ability to save money to settle them, the debt settlement process typically takes between 1 and 3 years to complete.

Who Should Consider A Debt Settlement Plan?

Debt negotiation/settlement plans are for people facing financial hardship and who are considering bankruptcy. They are not for people with decent credit and a decent income who are currently paying their debts but would like to discount those debts by 50% to 70%. If you are facing financial hardship then you may be considering bankruptcy as a debt relief option. Keep in mind that since the bankruptcy laws changed a few years ago, it has become much more difficult to declare chapter 7 bankruptcy (where your debts are erased completely, save a few exceptions). Since then debt settlement has become known as the "New Bankruptcy" and has become a much more popular option for people who would normally go right into a bankruptcy filing.

What These Plans Cannot Do For You

But for all the things that a debt settlement plan can do for you, there are many things that it cannot do for you, regardless of what some unscrupulous companies would have you believe. Here are some of the things that a debt settlement company cannot do...

  1. They can't stop your creditors from starting or continuing collection efforts.
  2. On that same note, they can't stop creditors from sending you letters and calling you on the phone.
  3. Your accounts can still be "charged-off", and it is likely that your creditors (or more likely the collection agency that they have hired) will threaten you with these charge-offs. Now, although it is not ideal to have a "charge-off" of debt show up on your credit report, once you decide to enter a debt settlement plan, you will have to resign yourself to the fact that your credit report and score are going to suffer.
  4. As I mentioned in number 3, some of your creditors will send your accounts to a collection agency. A debt settlement company cannot prevent this.
  5. In addition, some of your creditors will send your accounts to attorneys who will file lawsuits against you. If your creditors obtain a judgment against you, they can garnish your wages. None of these things can be prevented through debt settlement.

Before You Decide On Debt Settlement...

Now, this isn't meant to scare you off of considering a debt settlement plan. But you should have your eyes wide open when deciding on this option to eliminate your debts. Before you do embark on a debt settlement plan, whether on your own or through a debt company or attorney, I would recommend that you do at least these two things.

  1. Speak to a professional debt counselor and have them provide you with a personalized financial assessment. They will be able to then advise you as to your best options to get out of debt. I recommend you seek a company that offers a wide range of debt relief options, from credit counseling to debt settlement and bankruptcy filing. This way, after your initial consultation, (which should be free by the way) the counselor can advise you on an appropriate option for you based on your situation and not on what options their company offers. If debt settlement is recommended, then move on to my second recommendation.
  2. At the very least you should speak with a bankruptcy attorney before you enter into a debt settlement plan. There is a good chance that regardless of the new laws, you may still qualify for chapter 7 bankruptcy. And a lawyer trained in bankruptcy and debt resolution is the best person to advise you on this. What you want to avoid is a situation where you end up in a debt settlement program for 12 to 18 months only to realize after much time and great expense that you should have just filed for bankruptcy in the first place.

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