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Debt Settlement Programs 101

Most debt settlement advice is that you should avoid it. However, there are some situations when settling your debts makes more sense. For example, when no other debt solution will work for you, settling your debts is preferable than letting your debts remain delinquent and facing the risk of a lawsuit.

How Settlement Works

The gist of debt settlement is that you convince your creditors to accept a lower amount as satisfaction for your debt. For example, if your outstanding balance is $5,000, you might get your creditor to take $2,500 for the debt. However, no creditor will accept a settlement offer if you’re current on your payments. You must be delinquent and in danger of default before the creditor will accept a settlement.

Why Debt Settlement

Many people choose debt settlement because other debt management solutions won’t work for them. Credit counseling may be out of the question because the monthly payments are too high. Debt consolidation is usually impossible because you can’t get a consolidation loan or you don’t have any home equity. You may not qualify for Chapter 7 bankruptcy because on paper, you make too much money. Even if you do qualify for bankruptcy, perhaps you don’t want to stigma of bankruptcy following you for the rest of your life.

DIY vs. Hiring a Company

There are two basic ways to settle your debts: you can hire a debt settlement service to work on your behalf or you can settle debts on your own. Hiring a debt settlement service means you have to pay a fee – often upfront – to have your debts settled. You may not have any insight into the process so months can pass by and you have no idea what’s going on with your debts.

When you settle debts on your own, you have more control over the process and you don’t have to pay fees to a company, but it’s up to you to communicate with your creditors and work out a settlement.

The Truth About Debt Settlement

It’s true that your credit will be damaged in the debt settlement process, but if you’re already behind on your payments, your credit is probably already trashed. Once you’re done settling your debts, you can focus on rebuilding your credit, which is easier once your debt is out of the way.

There may be tax implications to settling your debts if you have more than $600 canceled with a creditor and you have a positive net worth at the time you settle the debts.

Working with a debt settlement company is risky, so if you choose to hire a company, make sure you do your due diligence in picking one. Select a company that’s a member of The Association of Settlement Companies (TASC).

Take a look at these articles to learn more about debt settlement.

1. Learn How Debt Settlement Works
2. Starting a DIY Debt Settlement Program
3. The Downside to Debt Settlement
4. Debt Settlement DIY vs. Debt Settlement Services
5. Comparing Debt Settlement to Other Debt Solutions

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