Debt is something that you can’t really avoid. Whether it be credit card debt, student loans, or household debt, it’s near impossible to never accumulate any form of debt. This is why knowing how to pay off your debt is crucial to avoid being crushed by high-interest rates and the like. If your debt is already too high to manage, you might want to consider debt settlement.
While it isn’t necessarily the best option for most situations, it’s still something that’s well worth looking into. To put it simply, debt settlement is an agreement wherein the lender accepts a reduced payment rather than the full payment that was agreed upon.
And while this may seem like a simple process, there’s actually a lot of work that goes into it. Considering how important debt settlement can be when it comes to managing debt, learning more about this process is well worth the trouble. If this is something that you’re interested in, read on as we break down everything you need to know about the process of debt settlement.
What is Debt Settlement?
As we’ve mentioned above, debt settlement is an agreement between a lender and a borrower, which has the borrower pay a large sum of money towards their existing balance in return for the forgiveness of their remaining debt. For example, if you owe $5,000 on a single credit card you may then approach the borrower and offer to pay $2,500 to nullify the entirety of the debt.
Now, the first question you may have about this is why any lender would be willing to forego the money that’s owed to them? Well, the answer is a lot more simple than you may think. Lenders are either in need of money or are worried that you won’t be able to pay off the balance anyway.
Debt settlements are quite common for debts that are considered unsecured loans. Unsecured loans are loans that don’t have collateral. Basically, lenders are willing to bite the bullet and minimize the amount of money lost.
There are a slew of different ways to approach negotiating a debt settlement. You can either do everything yourself or hire a debt professional that may be more experienced when it comes to getting the best deal possible.
Lastly, some of you may be a little doubtful about how often settlements go through. You’d be surprised how many lenders are willing to settle on debt instead of taking the full brunt of the losses. In fact, the Federal Trade Commission estimates that about half of debt settlement cases make it to completion.
How Does Debt Settlement Work?
So how do you begin this process? Well, the first thing you have to decide is if you’re going into this alone or will you be making use of a debt settlement company to help you out. Both of these options have their advantages and disadvantages and merit further examination as they will also determine how you go about the entire process.
Debt Settlement Companies
The main difference between debt settlement companies and doing everything yourself is the amount of time and the money involved. If you choose to work with a debt settlement company, the entire process can take around 3-5 years to complete. The company will also be entitled to a percentage of the settlement, as a means to pay for their services.
There are a couple of things that you’ll want to take into consideration when hiring a debt settlement company. To help simplify things, we’ve put together a brief list of things that good debt settlement companies will do for you:
- They will disclose all fees and costs that come with signing up for their services.
- They will have clear and easy-to-understand policies about debt resolution.
- They will give you an estimate of the intended results without assuring that you’ll get a specific value that’s too good to be true.
- They will inform you of the amount of money that you’ll need to save up before making concrete offers to your lenders.
- They will run all the resolution offers by you before finalizing anything.
If you opt to go with this route, you can basically leave everything related to debt settlement up to the third-party company that you’ve chosen to work with.
DIY Debt Settlement
Doing everything yourself is a little more straightforward and will take relatively less time to complete the entire process. The main drawback here is that you run the risk of coming away with a deal that’s not ideal for your financial situation. This is because you’ll be negotiating the settlement yourself and your level of expertise will come nowhere close to that of professionals.
While it can be more difficult to do things this way, it’s far from impossible. If you’re really determined to do everything yourself, then you’ll need to make the necessary preparations to make the process run more smoothly.
The first thing that you’ll want to do is to assess your current financial situation. This is the time to determine how much you still owe and who you owe payments to. You can also take this time to discern whether or not you will push through with a settlement. If you aren’t that far behind on your payments, it’s also worth continuing to pay while you save up funds for your settlement.
After you’re done doing that, you’ll want to read up on your lenders’ policies. Remember that while lenders are open to settling, they have no obligation to settle with you. If your lenders have explicitly stated in their policies that they do not engage in debt settlements, then you may have to wait until they are sold to a different collection agency.
If your lenders are open to a settlement, then it’s time to approach them and try to work towards terms that are agreeable for both parties involved. Now, before you start discussing the terms it would be in your best interest to understand how much you can afford and work around that amount.
Now, one common mistake that people often make during negotiations is jumping the gun on a deal once their lenders reduce their debt by a minuscule amount. You’ll want to make sure that you’re getting the best terms possible. Don’t forget that the point of debt settlements is to arrive at an amount that you can pay with little to no issues.
The last thing you’ll want to do is to get everything in writing. Once you’ve agreed to terms, be sure to ask for a written agreement. It would be wise to be thorough when going through this agreement, as you’ll want to make sure that you understand the payment terms, due dates, and penalties.
During this last step of the process, it’s important that you remain patient. Some lenders will try to sneak terms that can make life difficult for you by trying to rush you into signing an agreement. If this ever happens to you, we suggest that you drag out the entire process until they sufficiently explain everything to you.
Types of Debts That Are Eligible for Settlement
Like debt consolidation, not all types of debt are eligible for a settlement. This is because some lenders require you to put up collateral if ever you default on your loans. With that being said, there are common types of debts that are ideal for debt settlement.
Credit cards and medical bills are some of the most common types of debt that are eligible for settlement. This is because credit card companies and medical facilities have very few options when an individual cannot settle their debt. So rather than walking away with nothing, it’s in their best interest to agree to a settlement.
While federal student loans are viable for debt settlement, they are also rather difficult to navigate. If you default on your student loans, the government goes through a collection agency to collect a lump-sum payment from you. However, their terms are rather restrictive and will not be a practical option for many.
To settle a debt for your federal student loans, you’ll have to either pay the balance of the loan and interest but not the collection agency charge, you pay the principal plus half the unpaid interest, or you pay 90% of the remaining principal or interest. Private student loans are much easier to deal with as they are issued by banks and will follow the regular process of settlement.
We hope the information that we’ve listed above proves to be useful when it comes to helping you navigate the complicated world of debt settlements. Whether you go with a debt settlement company or choose to do everything yourself, be sure to make the necessary preparations to get the best deal possible.
Did we miss anything? Do you have more tips on how to pay off or manage debt? Let us know in the comments below!