There may be a time in your life when you feel like you’re in over your head and debt settlement may be a good option. You may have taken out one too many loans or maxed out your credit cards hoping for your income to take a turn for the better.
When this happens, the monthly payments can add up quickly, drowning you in debt. Credit cards with high balances can prove especially tricky to get out from under since they often carry interest rates of 20% or higher.
If this is a situation that you find yourself or your business in, you may be wondering: Can I settle a debt for less than I owe?
There are plenty of advertisements on TV, the radio and even the internet proclaiming that there are companies that can help you get out of debt for a fraction of what you owe.
But are these programs for real? And if they are, what are some of the potential benefits and downfalls?
Let’s take a look at what debt settlement is, how it works and whether it is a good option for you—or if there are other potentially better options, such as a debt consolidation loan.
What is debt settlement?
Debt settlement is a process by which you can settle all your debt with your creditors for a fraction of what you owe in total. Debt settlement is often handled by third parties who work on your behalf to negotiate your total outstanding debt with your creditors.
There are unfortunately a lot of scams that abound in the debt settlement world, so you should make sure you do thorough research on the programs and companies that are offering them before moving forward. While debt settlement could be a huge relief for you and your business, it could also cause irreparable damage.
How does debt settlement work?
The first step in debt settlement is for you to contact a company that will handle this for you. They can be called debt adjusting or debt relief companies. Once you hire a company, they will work on your behalf to reduce the total amount of debt you owe.
This company will contact your creditors to see if they can negotiate a total settlement of your debt, or sometimes even a reduced amount that can be settled through a payment plan. The ultimate goal is for this debt settlement company to reduce the total amount of debt you owe.
The debt settlement company will negotiate directly with your creditors. If they can agree on a settlement, it will be presented to you in written form for you to sign off on. Once this is done, you will be required to either make the lump sum payment of the settlement or make the negotiated reduced monthly payments.
The debt settlement company will either charge a flat fee for their work, or they’ll take a percentage of what you were able to save on your debt.
Typically speaking, you could expect to save up to a maximum of 50% as part of a debt settlement agreement.
Types of debts eligible for settlement
As you probably already know, there are many different types of debt—from secured debt to unsecured debt that come in various forms. Not all debts are the same, and not every type of debt can be settled for less than you owe. In fact, most secured debt such as home loans and car loans aren’t eligible for debt settlement. Neither are student loans, taxes, alimony and child support.
The three most common types of debt eligible for settlement include:
- Credit cards
- Personal loans
- Business loans
Pros and cons of debt settlement
There are several advantages and disadvantages to debt settlement. Make sure to review them thoroughly to make sure debt settlement is the best option for you and your business.
Some of the pros include:
- It could lower your total debt amount.
- It could free up the money used to pay the debt for other business investments.
- It could keep you from having to file bankruptcy.
- It could keep collectors and creditors off your back.
Some of the cons of debt settlement include:
- It could be expensive, with the fees a third party may charge you, even if you don’t settle for the full amount of the debt.
- It could negatively impact your credit score. Delinquent payments and even debt write-offs could cause your credit score to plummet.
- It could cause you to rack up more debt in the process. If creditors don’t agree to a settlement, you may end up compounding the problem with late fees and extra interest with missed payments in the meantime.
- It may be a waste of time and effort, as your creditors may not agree to settle.
What to do if you decide to try debt settlement
If you have decided to try debt settlement, there are a few things you can do to put yourself in a better position with a greater chance of settling your debt. These include:
- Continue making your minimum monthly payments while you negotiate the settlement.
- Show your creditors how bad of a position you’re in, and that you desperately need the help. As such, don’t rack up frivolous charges on your credit cards at expensive restaurants, for example.
- Cut down your spending significantly in the months leading up to your effort to settle your debt.
- Make sure you’re negotiating with the right people. If you’re handling the settlement on your own, ask to speak with a manager who hands debt settlements.
- Make an initial settlement offer that would see you save roughly 30% off your total outstanding debt. This will make it seem like you’re not being too greedy or overzealous.
Alternatives to debt settlement
If you find yourself in a bad position regarding an outstanding debt, debt settlement isn’t the only option you have. Here are some alternative options that could work out better for you.
- Negotiate your settlement on your own. If you feel confident in your ability, you could avoid having to hire a company. This would allow you to avoid paying the debt-settlement fees but would put you in a position you might not be familiar with.
- Transfer balances to low-interest cards. If you’re able to qualify for a low-interest credit card, you could benefit by transferring balances from higher-interest bearing accounts.
- Get help from a nonprofit. Some organizations provide credit counseling services to people and businesses.
- Get a debt consolidation loan. One other option is to obtain a loan to pay off all your outstanding debt in one fell swoop.
Debt can always be fixed
If you find yourself in a difficult financial position and you are having trouble paying a debt, opting to hire a debt settlement company to try to reduce your overall debt obligation may be the best solution. These third-party companies will work on your behalf and contract directly with your creditors to negotiate down the amount of money you owe.
While debt settlement may be a good option for some, there are potential drawbacks, including high fees associated with the service and a reduction in your credit score.
Because of this, one solid alternative to debt settlement would be a debt consolidation loan.
At Camino Financial, we work hard every day to help a variety of customers from different backgrounds achieve their financial goals. We also live up to our motto of No Business Left Behind by providing informational and educational resources for all of our customers.