Pros and Cons of Debt Settlement
Most of the people prefer debt settlement when they are not able to pay their debt anymore because they do not have a source of money anymore. You probably do not realize that you spent too much money with your credit until you have no idea how to pay your credit card debt. In some cases, there is no way to get out of the debt, but you may take a risky option and prefer to apply for debt settlement. So, let us find out what a debt settlement process is and what are the pros and cons of having debt settlement relief.
What is debt settlement?
Debt settlement also known as debt settlement negotiation is a way to reduce your debt in which you need to ask debt settlement agreement with your creditor and it will be considered as debt payment process at a low rate and then your debt will be erased forever. However, it is not easy to get this settlement because you usually need an assistance from a debt settler or debt settlement company and create a debt settlement letter if the creditors agree with your effort to finish your debt.
In some cases, you are not able to handle this settlement alone but you can count on debt settlement firm in which this firm will withhold your debt to the creditors after you make some agreement with the company that will help you finish the debt. In fact, not all of the debts can get this settlement, but it is usually only for unsecured debts such as medical bills and credit cards. Suppose you face bankruptcy and cannot pay your debt anymore, then you can call debt settlement companies. Some companies also usually provide debt settlement offer for those who really need this help. Nowadays, you can find so many debt settlers on the internet that give promises to settle your debt.
How does debt settlement work?
Simply, just because you prefer debt relief settlement, it does not mean that your debt is totally erased. You actually reduce the rate of your debt with the help of a debt settler. When there is an indication that you cannot pay your debt, then you can start to call a debt settlement company. Next, you must tell them about your current debt condition. You also need to tell them about the creditor where you owe. After that, the company will offer a settlement estimation to reduce your debt but you must be ready to pay a monthly payment at a lower rate to the company.
Usually, the company will ask you for not paying your debt anymore to the creditor and make your condition look worse and desperate. This effort will make the creditor settle and the company will offer a lump sum to pay your debt to the creditor and likely the creditor will approve it. The debt settlement company will also create a new saving account in which you need to pay it monthly to reach some amount of money. Then, the company contacts the creditor or send debt settlement letter for negotiation. Once the creditor approves the lump sum debt settlement estimation, then the company will start to finish the payment to the creditors.
Debt Settlement Pros and Cons
Debt settlement relief may sound promising, but there are also some debt settlement pros and cons that you may need to know. If you are about to get bankrupt, then you are not recommended to take this settlement despite it looks promising because you can reduce your debt rate. Therefore, you must read these following pros and cons before you take it and understand the consequences of debt settlement.
Debt settlement may reduce your total debt drastically
It is true that debt settlement industry gets popular these days and they will help you solve your debt problem and it will reduce your debt drastically with this settlement. This is one of the advantages of taking debt settlement for those who are currently going to be bankrupt while you have a lot of debts to pay in each month. So, you only need to call your debt settlement attorney to negotiate your bad financial condition and you also need to count on a debt settlement firm to get some assistance.
Once you call an assistance, a company, or a person who can help you settle your debt, then you must follow your assistance’s order so that the effort will succeed. This company will help you and offer a lump sum debt settlement to the creditor at a low rate. Meanwhile, you also need to pay some amount of money monthly to the company to get approved. In addition, you also need to stop the payment to the creditor.
For example, you owe $100.000 to a creditor while you have to pay it monthly at $1000 per month. Unfortunately, you cannot pay it anymore at that rate. In this case, you can call a debt settler to negotiate with the creditor to reduce your debt up to $500 per month. Then, the company will estimate the lump sum and then they will pay it to the creditor while you must pay monthly at a lower rate to the company that already helps you.
Save each month an amount you can afford to use to fund settlement
Now, it depends on the agreement with your debt settler whether you have to pay some amount of money first to your new saving account and then they will negotiate with the creditor about the lump sum that they will pay or they will estimate the lump sum first and then pay it to the creditor while you must pay monthly to the company at a new lower rate debt. Since you are no longer deal with a high rate of monthly payment to the creditor, then you can save some money each month that you can use to pay the settlement. So, your debt to the creditor is already finished, but you still need to pay monthly to the debt settlement company but it is at a lower rate.
Let us take an example; you may already make debt settlement agreement with a company that will help you out. Thus, the company will start to negotiate with the creditor and tells the creditor that your financial condition is bad so you cannot pay the debt anymore to the creditor. Then, the company will give a win-win solution to the creditor where the company will pay a half of your debt to the creditor in lump sum payment. Once the creditor agrees with the solution, the company will start to pay the lump sum debt settlement to the creditor until your debt is totally erased and your problem is solved. But, you still need to pay a new monthly payment to the company at a lower rate or it can be more than 50% lower than your previous debt rate.
Provides flexible payment arrangement or change can be made if needed
Debt dismissal may be the best and the only solution if you cannot pay your debt to the creditor at a certain rate anymore. However, you can still erase your debt and pay it at a lower rate up to 50% according to the agreement by the help of a debt settlement firm. This firm will help you handle your debt issue and they will negotiate with the creditor so that the firm will pay the debt in a lump sum at a lower rate. Meanwhile, you also need to arrange the payment to the firm after your debt is settled. Fortunately, this debt settlement is usually more flexible because you can arrange the payment and the amount of monthly payment is also low. In addition, you can also change the payment if you need according to the agreement of both parties or between you and the firm.
Attractive alternative to bankruptcy
When you are on the verge of bankruptcy while you have a lot of debt which is no longer possible to pay, then you should find the best alternative to solve this problem. You can solve your debt problems alone without the help of others. You simply come to the creditors and say that you cannot afford the monthly repayment anymore at that rate and ask them to reduce the number of monthly payments according to your capability. Perhaps, you can apply for a monthly payment reduction of up to 50%. Most likely, your creditor will refuse it but they may approve it if they do not want to lose. As long as your debt is not dependent on collateral, the possibility of a debt settlement will run smoothly.
Furthermore, when you personally apply for debt settlement to the creditor but they reject it. So you still have another way. This method will be more effective because you will not do debt settlement negotiation, but a debt settlement firm will help you. They do provide debt settlement services through the debt settlement offer they provide. Currently, there are many debt settlement services on the internet with some promising offers and that you can reduce your debt to 50% of your total debt. It is so interesting and promising that you may contact the debt settlement firm and tell them all your debt problems and let them know who you owe. After that, they will handle it and negotiate with the creditor.
Settlements typically completed in 3-5 years
Just because you apply for debt settlement, it does not mean that you are free from debt. Just keep in mind that you only try to reduce the monthly payment through this settlement. Fortunately, this settlement is typically completed in 3-5 years but it depends on the agreement with the firm you count on.
The process is also simple and you must not mind the consequences of debt settlement in this situation. If you are not able to solve your debt personally, then you apparently need to call a debt settlement firm to get some help. This firm will try to negotiate with your creditor so that the creditor is willing to reduce your debt up to a certain percent according to the agreement. Once the proposal is approved by the creditor, then the firm will start to pay a lump sum to the creditor at a certain amount and finally, your debt is over and erased.
Your debt to the creditor is done already, but you owe the firm at a certain amount depending on the agreement. So, now you have to pay monthly at a lower rate to the firm that you will finish in 3-5 years. In this case, you will not feel overwhelmed with your previous debt because you have new debt at a more affordable monthly payment to the firm that helps you. In addition, you can complete the payment longer up to 5 years. Certainly, this will make you relieved and you can still use a half of your monthly salary to finance your family life.
Credit profile will be negatively impacted
This can be the first consequence of debt settlement that you must realize before you take it. When you go bankrupt and cannot afford to pay your debts, it is categorized as bad credit. Bad credit shows that you have a bad reputation in terms of loans. Debt settlement may be the last alternative if you are already in desperate condition. However, you have to accept the consequences and get a bad reputation in the end.
Anyway, how can it give a bad impact toward your credit profile? Well, when everybody knows that you’ve taken a debt settlement step, you will get into trouble when you want to borrow money in the bank, buy a car with a loan, or buy an apartment. In fact, some cases you will also get into trouble when you want to apply for a job in certain companies and also unable to start a new business. It is really difficult to build a trust for the second time, except you can really convince them that you will repay your debt on time. You are no longer able to get a loan from a bank to start your new business despite your business is innovative and promising.
Debt is not repaid in full
You should remember that debt settlement is not a solution to pay your entire debts, but it is only reducing the amount of the debt. In other words, a debt settlement company will pay only a few percent of your debt to the creditor such as 50% of the total debt, while another 50% will be erased from the book by the creditor. However, you will get a bad reputation by the creditor due to this action.
This is different from debt consolidation in which you get a large amount of loan to pay off your debts or combine some debts into a single debt by not reducing the amount of the debt. If debt settlement will adversely affect your credit reputation because you will only pay off a half of your total debt, then debt consolidation does not give a big impact to your reputation because you will basically pay off all your debts.
Perhaps, if you apply for debt settlement, your debt burden will be even lighter despite you have to keep paying off every month at a lower rate to the debt settlement firm that has already helped. In addition, the payment duration can be arranged in accordance with the agreement between you and firm starting from 3-5 year. But, you still need to consider the consequence of debt settlement that will give a big impact toward your credit reputation.
Creditors are not required to accept settlement offers
You should know that when you choose a debt settlement, the creditor is entitled to refuse your debt settlement letter you propose to them. They may consider the magnitude of the loss when receiving your debt settlement. Then, they prefer to reject it and ask you to pay your entire debt. Otherwise, they may use legal means so that you pay your debt. If you get a loan with a collateral such as your house certificate or other kinds of valuable certificate, they can also seize your property in accordance with the agreement. However, this type of loan usually does not work on debt settlement. Maybe you prefer to contact a debt settlement company to help you, but it does not mean the creditor must agree with your debt settlement. It depends on how the debt settler tries to persuade the creditor so they agree and reduce your debt rate. If not, then there is no other way than to pay off your entire debt to the creditors or you will receive the consequences.
Debt balances get increase during the negotiation
Debt settlement cannot be completed in just one day. Thus, when you stop repaying your debt to the creditor and choose to call a debt settlement firm, then the late fee and interest are likely to increase while the process of negotiation is currently running. Now, you can imagine what if the negotiation is not accredited by the creditors and the debt settler is not able to help you? Of course, this will burden you because you have not paid the debt for several months and the interest rates are also increasing. Then, what can you do when your debt settlement is not approved? Now, you are already bankrupt, then you become even worse and desperate. Perhaps, you can try contacting other debt settlement firms to negotiate for the second time. But, you can only pray when the negotiation takes place because if it fails for the second time, then your debt balance will surely increase multiply.
It typically takes 6+ months before the first settlement occurs
As mentioned earlier, debt settlement cannot be done in one day. In fact, it takes 6+ months before the first settlement occurs. The first month will be your time to call a debt settler and they will check your documents, debt records, and the creditor data. After that, you need to wait for your proposal to be accepted. After that, the firm will ask you to stop repaying your debt to the creditor for a few months and start to deposit to your new account. After more than six months, the debt settler will start to negotiate with your creditors and tells them that you are already bankrupt and cannot pay the debt anymore. The firm has a task to persuade the creditor and make sure that debt settlement is the only best way to solve it. Once the creditor agrees with it, then the debt settler will pay your debt in the form of a lump sum to the creditor while you need to pay monthly to the firm at a lower rate for a few years. So, for six months before the negotiation, you will be worried just in case this does not work and even burden you.
Collection activity will escalate
When you prefer a debt settlement process, it does not mean that you have no debt anymore. But, you still have a debt to debt settlement firm that has helped you pay your previous debt. Meanwhile, your debt to the creditor is already done, but you still owe the firm. In this case, the collection activity will escalate. So, you cannot mess up with the firm. Now, you are totally monitored because they also have bad credit reputation.
You may be taxed on the portion of the debt you don’t pay back
The last consequence of debt settlement is that you may be taxed on the portion of the debt you do not pay back. So, just because you choose debt settlement, it does not mean that you are free from tax. When your debt settler helps you pay your 50% of your total debt to the creditors, you usually need to pay the tax as much as 50% of the debt you do not pay back. But, it also depends on the regulation and agreement that are made.