Debt Settlement as a Strategy to Avoid Bankruptcy
Debt settlement is a debt reduction solution that is designed to allow borrowers to pay off their loans faster. Known as credit settlement and debt arbitration, this approach helps people to reduce the total amount of their debt. It is a good solution for borrowers who are overwhelmed by excessive debt, including personal loans, credit cards, medical bills, and other unpaid bills.
Borrowers who take out payday loans, put off payments, or skip payments often resort to settlement. Some settlement companies recommend saving up money to make a lump sum payment. Borrowers stop making payments to save money for the lump sum payment. This is a risky decision that may lead to credit score damage. Your credit score will be tarnished if you fail to make timely payments. Moreover, your bank and other creditors may file a lawsuit against you if you default on your debts. Another problem is that settlement companies charge a lot of money for the service. Some companies charge up to 18 percent.
Two Options for Borrowers
They can either use the services of a debt negotiator or negotiate by themselves with creditors. If you prefer to hire a negotiator, look for a reputable company. Reputable debt and credit services have a solid client base and rely on their customers for referrals. They rarely advertise their services through email, telemarketing, and TV ads. Ask about the fees they charge.
Financial institutions are often willing to settle for less, especially if the borrower is about to default. The first step is to prioritize your loans and bills. There are priority debts and bills such as court fines, child support, and electricity and gas bills. Non-priority debts include catalogues, hire purchases, and money borrowed from family members and friends. Make sure that you pay off your priority debts first and keep records of all transactions and interactions. Keep track of all phone calls and written communication, including details and dates. If you come to an agreement with your creditors, you should ask for a signed copy of the agreement.
Credit Score is Affected
While debt settlement usually affects one’s credit score, most debtors already have a tarnished score. Once borrowers repay their debts, they can start to rebuild their credit score. The major benefit of credit settlement is that people with excessive debt avoid bankruptcy. Bankruptcy is an alternative to settlement, but it is a last resort for debt relief. To find out whether settlement is the best option for you, consider the extent of your problem. List all balances, including collection accounts, personal loans, and credit cards. Then list all rental income, investments, savings, child and spousal support (alimony), and paychecks. Find out how much you need every month – groceries, utilities, medical bills, gas and electricity, transportation, rent, etc. Subtract these expenses from your income to see if there is any money left to pay off your debts. This will help you to decide whether to negotiate with creditors or file for bankruptcy.
It is important to consider the pros and cons of each solution. Tax problems, tarnished credit, and possible collection lawsuits are some of the drawbacks associated with credit settlement. The borrower may have to pay taxes on the cancelled amount. Another problem is that creditors may not agree to the settlement offer.
Benefits
There are benefits to debt settlement, one being that borrowers repay their loans quicker. In most cases, it takes between 2 and 4 years to pay off your debts. People who opt for credit counseling or debt consolidation usually pay back their debts in 3 to 5 years. Another advantage of this approach is that borrowers save money. Creditors may agree to reduce the principal balance by 50 percent. Debt settlement plans allow borrowers to reduce their unsecured loans by 40 – 60 percent. In contrast to bankruptcy, your financial information will be kept confidential. If you file for bankruptcy, your financial details will be disclosed publicly.
Once the creditor agrees to a lump sum payment, borrowers have less to repay. Basically, settlement is a legal way to reduce the amount of your debt load and pay off your loans faster.
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