Sometimes, we find ourselves in over our heads. You may try to use your credit wisely and still find yourself far behind on payments. Things happen. You might lose your job, experience illness, or find yourself befallen by some other misfortune.
How do you turn things around?
One of your options is debt settlement.
What is Debt Settlement?
Debt settlement, at its most basic, is the concept of negotiating your debt with your creditors. You may be surprised that creditors would be willing to negotiate your debt, but it makes sense.
If realistically, it’s going to be impossible for creditors to recover your debt, they may be willing to take a smaller sum so they don’t lose out entirely.
Should you Negotiate Debt Settlement on your Own?
Most people aren’t on great footing to negotiate with creditors themselves. There’s a lot of nuance and financial know-how involved in negotiating a debt settlement.
You have to understand how many resources creditors are going to put into recovering a debt, how valuable your debt is to the creditor, and how much they might realistically expect you to pay given your financial circumstances.
You also need to know a whole lot of other things, from how interest rates affect your debt to how your creditors acquired your debt (the company you were originally indebted to isn’t necessarily the one who owns your debt).
Debt settlement companies can handle the process for you. They’re known by many names – debt consolidation, debt negotiation, and debt relief companies. These are all popular ways of referring to debt settlement, and that’s the short list.
How Debt Settlement Companies Work?
Here’s a quick breakdown of how debt settlement companies usually work.
First, they’ll ask you to start making monthly payments to a bank account – the money you place in here will eventually be used to make a lump sum payment to your creditors.
From there, the debt settlement company will begin negotiations with your creditors. They may ask you to stop making any payments to your creditors.
The reasoning behind this is simple – if creditors learn that you won’t make any payments to them, it puts the squeeze on them to settle for less.
In order to ensure that they can communicate and pay your creditors effectively, some debt settlement agencies may ask you for a power of attorney.
Should you agree to this, be very careful – power of attorneys can be quite powerful. Make sure they send you a notice of every payment they make to your creditors, and never sign a power of attorney over to a company you don’t trust fully.
Is Debt Settlement Worth It?
You can choose to use a debt settlement company – it’s not always an unwise decision. That said, you should know about some of the risks inherent in that decision.
First, ask yourself this question: will debt collectors settle for less? The answer isn’t always yes. Your creditors are under no obligation to settle for less, and if they choose not to, you could end up in pretty hot water.
Let’s say your debt settlers use the tactics described above. By not making regular payments, you’ll be accruing interest on all of the payments you didn’t make.
Should the creditor decide not to accept the settlement, you’ll end up in more debt than you would have been without the debt settlement company.
That has two major consequences…First, you’ll have to pay even more money than you did before. Second, your credit score, which was probably not doing well to begin with, is going to take an even bigger hit.
The worst part is, your debt settlement company may charge you fees even if they’re not successful in negotiating your debt down. In other words, you may pay them a lot of money for literally no gain.
More Ways to Settle Debt
With the risks of debt settlement companies explained, you have a number of other options. The first is one we’ve already discussed – settling the debt yourself. We’ve already gone over why that may not be the best option.
There are a couple of other resources at your disposal. You can find a not-for-profit credit counselling organization. These organizations might not negotiate a debt settlement with your creditors, but they can offer other services, such as:
You may still decide to pursue debt settlement, but see if you can find a not-for-profit that does debt settlement first.
Even if you can’t, it’s still worth talking to a not-for-profit so you can fully evaluate your options regarding debt reduction.
Some credit card companies have made tools available so you can reduce the interest that you have to pay on your debt.
So-called “balance transfer cards” will usually come with a 0% interest rate for a number of months, so you can transfer your debt to the credit card to get some relief on interest payments.
Tips on Choosing a Debt Settlement Company
Should you opt to go the debt settlement route, there are a few red flags you should know about. Encountering these red flags is a sign that the debt settlement company may not be entirely honest.
High-pressure sales tactics are a sure sign that the debt settlement company is looking to make a buck. This will not help you get out of debt.
High fees are yet another sign that you’re in trouble. Ask how much the debt settlement company thinks they’ll be able to reduce your debt, and figure out what their fees are as a portion of the amount they think you can save.
Here’s the kicker – when a company has very high fees, they’ll try to sell you on those fees by saying they can reduce your debt by an incredible amount. Incredible is used in the literal sense here – if it seems too good to be true, don’t believe it.
Remember, creditors can completely refuse to negotiate with debt settlement companies, and you’ll still be on the hook for the fees. No one can guarantee you anything.
Get the Most Out of Debt Settlement Companies
All in all, the best way to get the most out of debt settlement companies is to do your research. Don’t just look at reviews – get testimonials, contact the people involved in those testimonials and have a lengthy conversation with them.
Find out exactly what the process they went through was, how much debt they had, what it was reduced by – whatever they’re willing to discuss with you.
You Can Get Through This!
Whether you go through debt settlement companies or not, you can do this. The debt you have will not be with you forever. The work might be hard, but getting the burden of debt off your shoulders will be rewarding.
Marianne Pierce is a blogging enthusiast and has 5 years’ experience in the digital marketing field. She loves applying her knowledge of writing and marketing to new content pieces, helping her to share tips, tricks and hacks with readers.