Debt Settlement: Knock out Debts One by One

Take a look around: do you see yourself surrounded by bills that you cannot pay? Unsecured debt, such as credit card bills or medical bills, can pile up quickly and make it impossible for borrowers to pay off their debts. Borrowing from one credit source to pay off another only can work for so long, and then what? Is bankruptcy the only way out when one is completely consumed by debt?

Fortunately, there are other viable options for debt relief besides the drastic move of filing bankruptcy. Debt settlement is one of the most effective, fastest, and least expensive relief methods available. When done properly, debt settlement can reduce your unsecured debts by 40% or more.

While it is possible to pursue debt settlement yourself, the process usually begins with enrollment in a debt settlement company. Upon enrollment, you will cease (or continue to avoid) payments on a monthly basis to the creditors with whom you would like to settle. Instead, you will save up your disposable income in a “settlement account”. As the money in your account begins to accumulate, the company with which you are working will negotiate with one of your creditors to agree upon an account balance that is less than that of your original debt. Once your account has grown to the agreed upon amount, that creditor is paid and your account is considered paid in full. The process then repeats with your other creditors.

It may seem against intuition that creditors would accept payment that is less than the full extent of what they are owed, but in reality it makes a great deal of sense. After all, if a creditor turns down a proposed settlement, then the borrower might file bankruptcy. When a consumer files bankruptcy, his or her creditors often receive none of the debt they had been owed. Obviously, it is in a creditor’s best interest to receive partial payment rather than none at all.

Sometimes creditors may not agree to settle immediately, but you (and the individual working on your behalf) must be patient. Usually they will come around.

The entire debt settlement process generally lasts one to three years. While settlement often lowers debt significantly, the terms of your settlement can never be guaranteed, nor should they be. Guarantees of your outcome before negotiations are just one sign that you may be dealing with an illegitimate debt settlement company. Such a company certainly is something to avoid like the plague.

Recall from the top of this article that, while in the debt settlement process, your money is saved in a “settlement account”. Who would you like to be in charge of this settlement account? There are some companies who put themselves in charge of your funds, and unless you trust one such company with your entire financial life, you should always go for a company that puts you in control of your account.

The best way to ensure that any prospective company is worthy of your trust is to check its credentials. Consult the Better Business Bureau (BBB) to make sure that a company does not have an excessive amount of customer complaints. A worthwhile company also should be listed with your local Chamber of Commerce. Additionally, it is important that a debt settlement company hires arbitrators who are IAPDA certified.

For those of you who are bold, it is possible to tackle debt settlement yourself without the help of a company. While it may be intimidating to do so, there is nothing wrong with asking your creditors to settle for a lower balance, and you may be very pleasantly surprised by their response. It merits repeating: creditors would rather receive some payment than none at all. In reality, there is nothing that a debt settlement company can do that you cannot do with some effort and gumption on your part.

Before deciding upon debt settlement, consider the debts for which you are seeking relief. Check the statute of limitations on collecting your debts, or the period of time during which a company can attempt to collect from you. If the statute of limitations on one of your debts is five years, for example, and your debt is four and half years old, debt settlement might not be worth it. Similarly, most debts older than seven years can no longer be reported on your credit report, although a creditor can take legal action against you after this point if the statute of limitations has not yet run out.

While debt settlement usually is a good alternative for debtors in lieu in bankruptcy, you should be aware that your credit score probably will be affected negatively before it ultimately gets better. Because your disposable funds will be collected in an account to pay off creditors, your individual debts will fall behind, and your creditors can report your failure to pay to the credit bureaus. In any case, however, this temporary lowering of your score is much less dramatic than the negative affect bankruptcy has on your credit.

If you have substantial funds to pay some of your debts and are looking for debt relief outside of bankruptcy, debt settlement can be a great choice. Either through a debt settlement company or on your own, negotiating debt with creditors and paying them off one by one may relieve you of your debt more quickly and cheaply than would be possible with another method.