If you’re struggling to pay off debt, it’s important to know that you have multiple options for repayment. One option is to settle the debt. Debt settlement is a process in which you or a debt settlement company negotiates with your creditors to reduce the amount you need to repay.
Unfortunately, not all debt settlement companies can deliver on their promises. As you weigh the pros and cons of debt settlement, you should also be aware of other ways to manage your debt, such as debt consolidation through a credit card or personal loan.
Debt settlement is a strategy to alleviate your debt by negotiating a payment with your creditors that’s lower than your outstanding balance. If you’re approaching bankruptcy, you might consider this strategy as a solution to eliminate your debts.
For example, if you owe $10,000 in credit card or personal loan debt, you might pursue a debt settlement negotiation. If agreed upon, the creditor might accept a lower total payment, such as $5,000, and consider the rest of the debt forgiven.
Although many unsecured debts, like personal loans and credit card debt, are likely eligible for a debt settlement, not all creditors will agree to a settlement. Some factors they might consider include the amount owed, how long your credit account has been active, your prior repayment history, and your income level. If a creditor deems you financially able to make good on your debt, for example, they would be less motivated to settle.
Debt settlement reduces the amount of money you pay toward your outstanding debt balance. You can either negotiate directly with a creditor or use a third-party debt settlement company.
In some cases, a debt settlement company may encourage you to stop making payments in an attempt to leverage the creditor into a settlement agreement. Proceed cautiously in this scenario, though, as stopping payment toward a debt could actually diminish your leverage. Missed payments will negatively impact your credit and may back you into a corner of having to accept a settlement. Keep in mind: The debt settlement process can take as long as three to four years.
Although settlement is an option for alleviating your debt burden, there’s no guarantee that a creditor will accept the proposed settlement. Even if they do, you’ll still be responsible for the agreed upon amount, plus any fees or penalties your creditor or debt settlement company charges.
Debt settlement is one potential solution for lowering the amount of debt you have to repay, but there are both advantages and disadvantages to this strategy.
Here are some pros and cons of debt settlement to consider:
Debt consolidation is the act of taking out a single new loan to pay off multiple debts. Debt settlement is the act of negotiating with your creditors, usually through a third-party company, to pay less than you owe.
The biggest difference between the two is that you repay your full amount with debt consolidation, while a debt settlement agreement may allow you to repay less. Keep in mind that debt consolidation is usually less impactful on your credit score than debt settlement, as you’ll continue to make payments until your debt is paid off.
Related: Learn more about getting a personal loan on Credible.com
If you feel that debt settlement is the right solution for your financial needs, it’s important that you investigate this option thoroughly before enlisting services. Research providers to find a reputable and legitimate debt settlement company.
For example, you can contact your state Attorney General, a local consumer protection agency, or the Federal Trade Commission to ask about complaints filed for the company you’re considering working with. You can also consult a reputable credit counseling service or financial institution (such as your bank or credit union) and ask if they can provide information for debt settlement companies in your area.
When you’re ready to move forward with debt settlement, you’ll first need to decide whether you’re going to use a debt settlement service or try to negotiate a debt settlement plan directly with your creditors.
If you’re using a third-party company, they’ll likely outline the fees associated with their services and request information related to your outstanding debts and income level. These fees typically range from 20% to 25% of either the amount saved or of your total debt balance — but keep in mind that everything is negotiable.
If you’re negotiating a debt settlement independently, come prepared with a proposed debt settlement plan that outlines how much you can pay outright to settle your outstanding debt. Your creditors will request information related to your income and other outstanding debts. They may also try to negotiate a higher repayment amount.
Finally, you’ll receive a settlement decision. If your debt settlement is accepted, you’ll need to prepare the transfer of funds on a given date. Additionally, if you used a debt settlement company, you should expect to receive a bill for their services.
Debt settlement may sound like an attractive option, but the risks involved make it a less than ideal solution for some borrowers. If you’re hesitant to seek out a debt settlement, consider these alternatives to help you get out of debt:
You could also take out a personal loan specifically for debt consolidation. Debt consolidation loans are designed to help borrowers consolidate multiple debts into one loan with a single monthly payment.
With a debt consolidation loan, you might be able to get a lower interest rate than you’re currently paying on your existing debts. If you don’t want (or can’t afford) a higher monthly payment on a debt consolidation loan, you could opt for a longer repayment term to make your payments more manageable. Just keep in mind that longer terms mean paying more overall in interest expenses over the life of your loan.
Related: Learn more about getting a personal loan on Credible.com