When you have managed to accumulate a lot of debt, it can be very easy to be lured by the many advertisements that promise to drastically reduce your debt through a debt settlement process. However, just like most things in life, you need to weigh the pros and cons thoroughly before jumping in to solve your financial mess.
Debt Settlement – What Is It and How Does It Work
The process of debt settlement usually involves engaging a professional company specializing in the activity to assist you to lower personal debt outstanding. Often these companies advertise their services as debt consolidation, but usually their principal line of business is to negotiate favorable terms of settlement for your personal unsecured loans and debts. The engagement of a debt settlement firm is a mandate given by you to them that allows them to negotiate with various credit card companies and issuers of personal loans so that the amount of principal outstanding and accrued interest is reduced substantially. This means that your monthly outgo in servicing these loans also sees a dramatic reduction. In fact, usually you will be required to pay the monthly dues to the debt settlement company and they in turn will pay off the various debtors after retaining a part of your payment as their fees.
Debt Settlement – How Does It Work
After examining your state of finances, usually the very first thing a debt settlement company will tell you will be to stop all further payments to the lenders. This is a strategy that is adopted to exert pressure on to the lenders so that they will become increasingly desperate to collect at least a part of their total outstanding before the client goes completely insolvent. Usually, it helps if you have missed payments earlier and not been up to date with the payment schedule as this assists the debt settlement company to paint a really grim picture about your finances and why they should negotiate a settlement for substantially less. The process of negotiation is skilled and this is why it may be advisable to hire a professional company rather than trying to undertake the job yourself to save on the fees.
Debt Settlement – The Advantages
The process of debt settlement ensures that a really substantial portion of your total debt is waived, enabling you to be completely debt-free in about 2-3 years. Since all debts above $1,000 can be included for the purpose of debt settlement, it is likely that you will be able to achieve substantial reductions of 50% and more of your debt outstanding and commence rebuilding your creditworthiness. In fact, you may be able to persuade some creditors to bring your accounts to a current status so that this reflects in your credit score improving immediately. You should also insist that your accounts reflect as being paid in full rather than settled as this will work better to improve your credit score. The result of having your debts settled is that you would be free of legal action or repeated follow-ups by collection agencies. Even after paying the fees of the debt settlement company, it is likely that you will have more disposable cash every month allowing you to live better and even save for high-priority needs such as housing, transportation and medical bills.
Debt Settlement – A Few Drawbacks
Regardless of what may be told to you, the process of debt settlement is rarely without impact on your credit score and hence it is an option that should be really pursued by folks who already have a credit score that’s severely under pressure. If you are unable to negotiate with you lenders to make your settlement as “paid in full”, they will usually mark it as “settlement accepted” and this will severely damage your credit score for as many as seven years. Also, remember that making late payments or even stopping payments to lenders on the advice of the settlement company gets reported and affects your credit score progressively. Some settlement companies are also notorious and they are extremely opaque regarding their actual fees.So, it may be very difficult to establish how much they are deducting as fees from your monthly payment. It is extremely important to read debt settlement reviews available online and decide on a reputed company to avoid being scammed.