Do Not Overlook Lump Sum Payments in Debt Settlement

Debt Settlement is becoming an increasing popular alternative to bankruptcy as increasingly more consumers find themselves struggling to keep up with their minimum credit card payments. There is no shortage of advertisements screaming how easy it is to eliminate your debt through debt settlement. One of the primary draws is the ability to settle your debts without borrowing more money or impacting your monthly cash flow. Just divert your monthly payments to a settlement account, and you too can be debt free. Very few talk of using lump sum payments to increase your likelihood of success.

Most debt settlement companies structure their programs so that you save money in a settlement account over the course of 36-60 months. The goal is to save roughly 50% of your outstanding balances, minus the debt settlement company's fee, during that time. You no longer make payments directly to your creditors.

On the surface, and without the debt settlement company going into detail, this can sound very attractive. For example, if you owe $25,000 in credit card debt with a current minimum monthly payment of $500, you can reduce your monthly payment to $300 and expect to settle in 42 months at $.50 on the dollar.

Looks attractive, doesn't it?

The above analysis lacks two very important considerations:

1. While you no longer make payments to your creditors, your balances will increase from their original amounts due to late fees, penalties, and interest charges. The settlement amount will represent more than 50% of the original amount.
2. Your creditors will only wait so long to receive payment before exploring their legal options. The longer it takes you to negotiate a settlement, the more likely you face a potential lawsuit.

Increase Success With A Lump Sum

You will dramatically improve the likelihood of successfully completing the debt settlement process if you are able to shorten the time period by accessing a larger sum of money at the beginning of the process.

Look for Opportunities to Generate Cash

There are probably sources of cash available to you that you haven't considered. You may have assets or access to loans, and you should tap them if possible to settle your debts.

1. Sell something. Perhaps you have a boat, motorcycle, or car that you do not need.
2. Borrow money from friends and family or a retirement account. Consider the consequences of not being able to repay this debt should something happen. Consult with a tax or financial advisor prior to doing anything with a retirement account to understand the longer term impact of such an action.

The more money you are able to raise at the beginning of the process, the quicker you will be able to save the necessary funds to settle your debts. Most creditors will be open to working with you through the debt settlement process, however, the longer it takes, the less patient they will become, and the more likely they will explore legal action against you.

About the Author:
Chris Rocks is the Founder and Executive Director of the Credit Advisory Alliance (CAA). CAA is a nationwide membership-based organization that assists consumers recovering from a financial difficulty and those who need a significant increase in their credit score.

Chris began his financial services career as a Financial Advisor helping young families with risk management and asset accumulation strategies. It was during that time that Chris realized that many of these young families also needed someone to guide their choices with regards to debt management.

He made the transition into the mortgage industry where he first worked as a loan originator and later the Vice President of a small mortgage company. As Chris came across clients who had suffered through financial challenges and saw the difficulty they had in re-entering our credit driven economy, he discovered there was a real opportunity to leverage his unique background and help others.