What is debt settlement? Well, if you believe the advertising that is splashed across newspapers, televisions and the internet, you would think it was "the" answer when it comes to getting out of debt...
These are just some of the more common claims that are put forth by debt settlement company and debt settlement attorneys. And when people who are facing extreme debt problems see these claims, the temptation to jump right in to this type of debt relief program is just too great to resist. But are these claims true?
Let's take a closer look.
By first understanding how a debt settlement program works, we will
be able to better determine whether the above claims made by the debt
settlement industry are true or not.
What is debt settlement?
Why would your creditors agree to settle your debts in the first place?
To answer that question let's do a little role reversal. Let's say someone owed you $10,000 and had been paying you $200 every month for the past year in an effort to pay you back. Then all of a sudden they stopped paying you for six months. Likely you would begin to worry. Finally they do contact you only to explain that they cannot pay back the money, and in fact they are considering filing for bankruptcy.
Now you really start to worry.
But then they offer you an olive branch of sorts. They offer to pay you a lump sum of $3,500 today if you will agree to dismiss the entire debt. This leaves you with a choice to make. Accept the guaranteed $3,500 or hold out for the entire $10,000 (or whatever amount is left owing on the debt). If you are convinced enough that you may never see the $10,000, you just might take the $3,500 today. As they say, a bird in the hand is better than two in the bush.
This is often the same type of scenario that your creditors find
themselves in, and why they will many times consider a settlement offer.
How much can you save?
Before paying any fees, it is possible to achieve discounts on your debts of 50% to 70%. (Fees typically run in the neighborhood of 15% of your total debt outstanding when you sign on for the program, thus reducing your actual savings to the 35% to 55% range.)
How long does debt settlement take?
Successful debt negotiations usually take between 6 and 36 months to complete, depending on how many separate creditors you have.
What is debt settlement 's effect on your credit?
Part of the process of settling debts is to stop making payments to all of your unsecured creditors (while continuing to pay your secured debts like your mortgage, car loan etc.) As you can imagine, this will have an extremely negative effect on both your credit report and your credit score (FICO score). Having said that, there are two situations where your credit score and report will benefit from a debt settlement program.
First, if you are able to avoid bankruptcy through the negotiation of a debt settlement, this will help your credit in the long run. Second, if your credit score and credit report are already very poor, settling your debts will likely help improve them both.
No. Only a bankruptcy filing can ensure these two things. However, if you (or the debt negotiation professional who is representing you) are successful in convincing your creditors that you cannot pay the debts, and that you are on the verge of bankruptcy, there is a good chance that they will not sue you. They have to believe that a) it would not be worth their time and b) that even if they received a judgment against you, they would not collect on that judgment.
Why not just file for bankruptcy?
There are two types of bankruptcy, Chapter 7 and Chapter 13. Not everyone qualifies for Chapter 7 bankruptcy which is the type that wipes out all of your debts (except tax debts and student loan debts.) If you don't qualify for Chapter 7, then your other option is Chapter 13 or "wage-earners" bankruptcy. With this type of bankruptcy you still have to pay back at least a portion of the debts you owe over a 5 year period, but you do get to keep most of your assets. Debt settlement can be a good substitute for Chapter 13 bankruptcy.
Alright, for the most part, we have answered the question, "what is debt settlement". And from that you should now have a pretty good idea of whether or not the claims that some debt settlement companies and lawyers make are true. But is it right for you?
Debt settlement is often called the "New Bankruptcy". It's called that because typically it is a debt relief program that is suitable for people who would otherwise be declaring bankruptcy. Therefore, if you are not a potential candidate for bankruptcy, then it is likely that you are not a potential candidate for debt settlement/negotiation either.
If you are still unclear of where you stand financially, and what
your options are for dealing with your debt, I recommend that you
contact a credit counselor for a free debt analysis. These
professionals will analyze you finances, help you prepare a budget, and
recommend a suitable debt relief program based on their findings. And
if I haven't completely answered the "what is debt settlement" question
for you, then they can even help you with that.