Debt settlement can be a great tool or a nightmare. Making the decision to enlist the services of a debt settlement company should not be taken lightly. Read on to gain an understanding of the pros and cons of using a debt settlement company.
What is debt settlement?
Debt settlement is a process that involves paying a settlement company less money than the amount owed to the creditor. In general, a debt settlement company will buy an old debt from a creditor for much less than the debt total(usually 10% to 20%) and then allow the debtor to pay off the debt for less(usually 30%-50%). This is a great option for many people, but you should consider the pros and cons of using a debt settlement company when deciding.
Debt settlement is a great option if you are interested in:
- Stopping the harassing phone calls and direct mail.
- Preventing a law suit.
- Paying less than the original debt total.
- Avoiding more complicated remedies such as bankruptcy and foreclosure.
Of course, there are downsides to choosing to use a debt settlement company.
- They often charge a fee which is a percentage of the amount they saved you from paying.
- While you are paying the debt settler, you are not paying the original creditor so the payments appear as missed on your credit report.
- The original creditor can submit a 1099 in the amount of the debt they had to charge off. This means you have to pay income tax on that amount.
- If you do not adhere to the agreement with the debt settler, your arrangement can be nullified.
Are there alternatives to debt settlement?
If you are in immediate need of a solution to fend off creditors, you may not have a better option than debt settlement. However, if you get a hold of the situation early enough, there are ways to avoid it. Some of those ways include:
- The snowball method – using this method, you decide how much money you can put aside to pay off debt every month. Then, you pay the minimum payment on all of your debts. After that, take what is left over and throw it at the smallest debt. Click hereto see an example of how this works.
- The debt ladder method – order your debts by interest rate (highest to lowest) and pay of those debts with the highest interest rates first. This allows you to pay less over all because you limit the amount of accrued interest.
- Negotiate with the creditor yourself – many creditors will not work with a debt settlement company. If you call the creditor, they may be willing to negotiate with you. If they will not, you can ask about any hardship programs you may be eligible for.
Debt negotiation can be uncomfortable for some people. It takes skill and experience to get creditors to understand that it is in their best interest to negotiate. If you are in a position where debt is piling up and you want to get out, contact Elias Dsouza. Elias has been negotiating debt for over 15 years.