Debt Settlement: How It Works and Risks You Face
Settling your debt isn’t easy. If you’ve reached a point wherein you feel like you’re drowning under a ton of debt and nothing you do is ever going to make a dent, then consider debt settlement plans. Here’s what you need to know before you proceed.
Is Debt Settlement Right for Me?
Debt settlement is often the only recourse when you have defaulted on your monthly payments for so many times that it compromises the belief of any creditor or collector in your ability to pay your debt in full. At this point, your credit scores are shredded, and you have little to no hope of ever making your monthly payment deadlines.
How Does a Debt Settlement Work?
A debt settlement management comes in to negotiate with your creditors on your behalf. They work to reduce the amount you need to pay. However, this only works on unsecured debts like credit card loans. If you have a house loan or debt from your medical bills, this isn’t the best approach for you. However, if the debt settlement works for you, then you’ll open a savings account and put your monthly payments there. You need to make the settlement company believe that you can’t pay. That’s how they’ll agree. Once the money in the savings account is enough for a lump-sum offer, the company deals with the creditor on your behalf to accept the payment. There are other debt relief programs out there, but this might be the best strategy for you if you can’t afford to pay in full.
What are the Risks I Might Encounter?
Debt settlement sounds like an ideal option. Who wouldn’t want to pay less than what they owe, after all? However, it does come with several risks.
- For one, there’s no guarantee that the debt settlement company will succeed. Some companies don’t want to negotiate. What you can do, though, to improve your chances, then, is to look for a company with a history of successfully resolving debt settlement issues for their clients.
- Another risk that you face is that your credit will take a hit. There’s no other way around it, especially when you stop sending payments to your creditors. You need to hold the payments in an account and wait it out to give the impression that you can’t proceed with any of the monthly payments anymore.
- You might also get penalties for the delayed payments. Penalties and interests could hit you big time, which could add more to how much you need to pay. Still, that’s a fair exchange when you consider the time it’ll give you to come up with the payment.
What Do I Need to Remember?
If you believe that a debt settlement plan is the best option for you, then you’ll want to consider the following tips:
- Find a reliable and trustworthy company that offers debt counseling and debt settlement services.
- Be honest with yourself. Can you really make the monthly payments?
Is the plan realistic? Don’t try to put all your money into your payments, leaving you nothing for yourself or even your basic necessities. That plan will never work.