6 Ways Debt Settlement Companies Can Help You

If you are drowning in debt, your financial future may look bleak. Knowing what options you have can help avoiding ridiculous attempts to pay off your debt. Depending on your situation, debt settlement may give you the help you need.

A debt settlement company negotiates with your creditors to accept a lump sum payment that is less than the debt balance. You will make monthly payments to a third-party savings account. Once you have accumulated enough money, these funds will be used to repay the negotiated amounts. Debt settlement programs offer some advantages, but also come with serious risks. Here are six ways debt settlement companies can help:

1. Provide industry experience

If you find yourself in heavy debt, you may not have much experience working with creditors to get out of debt. Working with a debt settlement company can put that experience on your side.

“A good debt settlement provider will know how much each creditor is willing to settle and what terms they will agree to at different stages of the process,” said Kevin Gallegos, Phoenix vice president of operations with Freedom Financial Network. In contrast, an ordinary consumer who tries to negotiate debt relief on his own may end up with a bad deal.

To learn: How to calculate your debt-to-income ratio

2. Lower amount of your debt

A successful debt settlement process reduces your total debt amount. On the other hand, credit counseling services reduce your payments, but not the total amount of principal you owe. In order to make large debt more manageable, look for a company that can reduce the amount of debt you owe.

3. Reduce multiple debts to a single monthly payment

Instead of processing monthly payments to each creditor, you put a monthly amount into the savings account. This way, you can focus on just one payment each month so you don’t run into late fees just because you’re overwhelmed with costs.

4. Help you avoid upfront costs

When you work with a legitimate debt settlement company, the Federal Trade Commission prohibits the company from charging you a fee before your debt is settled.

“Federal Trade Commission rules state that fees can only be charged after the company has successfully negotiated the debt on terms agreed to by the customer,” said Gallegos. “Reputable debt settlement companies will follow FTC regulations and will not charge any upfront or monthly fees. Fees should only be paid on the basis of results, ”he said.

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5. Prevent personal bankruptcy

If you manage to settle your debts successfully, you may be able to avoid declaring bankruptcy. Although debt settlement has its drawbacks, personal bankruptcy is the option of last resort. Your credit score will suffer if you choose either route, but you might feel like bankruptcy carries social stigma as well.

6. Create a plan to reduce debt

If you have no idea what to expect when dealing with creditors, working with a legitimate debt settlement company will give you an idea of ​​what to expect from the start. Before signing up, the debt settlement company should inform you of all of the following:

  • All fees and terms of debt settlement company services
  • How long will the debt settlement company take before making debt settlement offers to each of your creditors.
  • The offers that the company will make to each creditor
  • Whether the debt settlement company will ask you to stop paying your creditors and, if so, any negative consequences of non-payment such as interest, penalties and the impact on your credit score

Related: How to tell if you have debt in collection

Risks associated with the use of debt settlement companies

While debt settlement companies can help in certain circumstances, using even the best debt settlement companies comes with substantial risk. Government agencies such as the Consumer Federal Protection Bureau and the FTC have warned the process is fraught with risk.

“Debt settlement companies should be avoided whenever possible,” noted Curtis Arnold, credit card expert and founder of CardRatings.com. “The industry has a lot of bad apples, and the few good apples usually charge a high fee. Although you will be paying a lower total amount to your creditors when settling credit card debt, debt settlement companies do not work for free. They often charge a hefty fee, possibly based on how much they’ve saved for you.

First, beware of scams – for example if the company guarantees it can pay off your debt for pennies on the dollar, tells you to ignore your creditors without educating you about the consequences, promotes a “new government program” Or require you to pay them. in the front. Other risks include:

  • Tax consequences: Depending on your financial situation, any debt forgiveness by creditors could be considered taxable income. So you could trade in debt elimination for a tax bill.
  • No guarantee: Despite the promises debt settlement companies might make, there is no guarantee of success with debt settlement – and you could still increase your debt and ruin your credit. Creditors are not required to negotiate, even if you legitimately cannot pay your bills.
  • The costs could exceed the savings: Between the fees charged by the debt settlement company and the additional interest and penalties you accumulate for not paying your creditors, the total costs could exceed the savings.
  • Credit Score Damage: When you stop paying your debts, your credit score will be damaged. Plus, if the debt settlement company is successful in getting your creditor to accept less than what is owed to you, that debt forgiveness also hurts your credit score. “When enrolled in a debt settlement program, a consumer will default on listed debts that will appear on credit reports,” Gallegos added.

To find: Here is the amount of debt of Americans in 2017

Alternatives to debt settlement companies

Before signing up with a debt settlement company, be sure to consider other debt relief options so that you can weigh the pros and cons of debt settlement. Alternatives to debt settlement companies include:

  • Negotiate yourself with creditors: You don’t need to have the experience to call your creditors and try to negotiate your debt yourself. “Individuals can try to call creditors and apply for temporary hardship status,” Gallegos noted. “The DIY approach will save you money and maybe, more importantly, a lot of headache,” Arnold said. “It takes a little more effort in terms of self-education,” he said.
  • Credit counseling services: A credit counselor can help you take control of your financial life and help you as a debt repayment planner. Credit counseling companies are generally not-for-profit companies. They work to lower your overall monthly payment which you will be paying over a longer period of time. A credit counseling company will work with you to develop a debt management plan to resolve your financial issues.
  • Bankruptcy: Bankruptcy is usually a last resort to deal with your debt. Chapter 7 bankruptcy frees your debt, but with a few exceptions, all of your assets are used to pay off your creditors. Chapter 13 bankruptcy allows people with income to keep certain assets, such as a house or a car, and to pay off their debts over several years.

Following : What Happens To Debt When You Die?

Valerie Rind contributed to the writing of this article.

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