Debt settlement provides an effective means to payoff your debt, as long as you are fully educated in the process or can employ someone who is.
What is Debt Settlement?
When an individual accumulates so much debt that the monthly payment obligations become insurmountable or when changes in financial circumstances prevent an individual from paying debt obligations, other solutions must be explored. Obviously, the ideal is to get the debt paid off as quickly and as painlessly as possible. In the past, bankruptcy was the most feasible option for debtors, who then endured severe damage to credit ratings and loss of many accumulated assets in the process. Today, there are options to payoff debt, and debt settlement is increasing in popularity, especially as an alternative to bankruptcy. In the process of debt settlement, negotiations occur with each creditor or collection agency for a lower total debt amount, sometimes a 50% or more reduction.
The Process
Debt settlement is not easy or quick. It involves contacting each creditor or collection agency separately and negotiating a settlement with each one. As well, there are definitely different procedures to be used dependent upon whether the debt is now “owned” by a collection company or just transferred to it by the original creditor.
Anyone who decides to engage in the process of settlement by himself, needs to educate himself on both the federal and state laws involved, as well as the tactics used by creditors and collection companies in their attempts to collect. Lack of understanding of these can result in less fortunate outcomes. As well, the individual needs to engage in some solid self-analysis to determine if he/she has the negotiating skills as well s the commitment to see the process through to the end. Debt settlement is not for the meek or timid, because creditors and collectors will “chew you up.”
No debt can be negotiated until the debtor is 60-90 days in arrears on payments. Further, no creditor will be prone to negotiate a lower settlement if the credit report shows that all other debts are being paid on time. The creditor has to believe that the debtor really is in trouble and that the possibility of getting nothing at all is real. At this point, many credit card companies are willing to settle for 50% of the original debt. They can write off the rest as a loss, and they at least get half of what is owed.
If the debts have been turned over to collection agencies, the process will be very different. Nothing should be negotiated by telephone; in fact, most consumer watch groups recommend that a debtor have NO telephone conversations with a collection firm. Everything should occur in writing. The debtor must ask for debt validation first, to try to determine who actually still “owns” the debt. If the collection agency has bought the debt, it is important to remember that they purchased it for pennies on the dollar, and that puts the debtor in a great negotiating position. If the debt has just been transferred to the collection agency, it is working for a percentage of whatever it can collect, so negotiations may be a bit tougher.
Once the settlements are all reached, the debtor must be certain to negotiate payment plans as well. Normally, the debtor will not have the cash available to payoff the debt in one swoop. It then becomes necessary to secure some type of consolidation loan with lower monthly payments than before, or to make payment arrangements with each creditor.
Credit ratings will normally be affected negatively by collection agency involvement and by settlement agreements. It will take a great deal of self-discipline and payment responsibility to bring that score back up again.