Credit cards, loans and cash advances can be useful resources if you use them responsibly. If you’re weighed down by credit card debt and loans you can’t pay off — and you see no end in sight — it’s time to explore your options.
Find out how to negotiate settling your debts yourself. Learn how the process works and its risks and rewards. Here’s how to get the financial help you need to get out of debt now.
How Debt Settlement Works
When it comes to settling debt or paying off loans, you have options that range from financial counseling and planning to declaring bankruptcy. Somewhere in the middle is debt settlement.
Debt settlement companies contact each creditor or debt collector on your behalf to negotiate paying off your debts. They pay them off in one lump sum to provide you with immediate relief. After a company settles your debt, you pay it back by transferring money into a designated savings account each month until the balance is satisfied.
Different companies might have different requirements, but most have a minimum amount of debt required to be considered. If you don’t have substantial debt, debt settlement might not be right for you.
Debt Settlement Comes With Risks
Debt settlement, though appealing, is not without risks. For starters, look for reputable debt settlement companies with real user reviews. Second, make sure you meet the qualifications for debt settlement. Then, read all the fine print.
“For this to work out for the benefit of the debtor, the total cost of the debt settlement must be significantly lower than the amount of debt currently owed,” said Jude Lee, California corporate and tax accountant.
Although settling usually involves paying less than you owe, your debt isn’t the only cost to consider, Lee said. Settlement companies charge a fee of “generally 25 percent of the amount of debt canceled or forgiven — and you’ll likely owe income tax on the amount of the debt that was forgiven,” he said. “In many cases, the total cost of debt settlement might be more than the original amount of debt that was initially owed and the debtor could fall into the trap of calculating only the amount that was forgiven and not considering the total cost of the settlement,” said Lee.
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Other Options for Debt Relief
Settlement isn’t the only option for getting rid of debts. Review these four alternatives to debt settlement:
- Consolidate debt: You take out a debt consolidation loan to pay off your debts and have only one monthly payment. If you think you’ll be tempted to max out your newly freed up credit, however, this option isn’t for you.
- Declare bankruptcy: You can get legally released from specific debts and stop creditors from taking action against you as a debtor. Although this might sound good, this option will have the worst impact on your credit score.
- Formulate a debt management plan: Consider using a credit counseling organization to help you negotiate with your creditors. You might be able to lower or eliminate finance charges while you repay your debts.
How to Settle Debt on Your Own
If you don’t want to hire a debt settlement company, there are ways to do it yourself.
“If a debtor chooses to negotiate on his own, the chances of benefiting from debt forgiveness is much higher because the settlement fee is typically bypassed,” Lee said.
“[Settling on your own] will require much more personal effort, time and research to effectively negotiate a deal.”
Settling on your own could help you eliminate your debt and get you on the right path to financial stability. Follow these five steps to settle your own debt:
1. Contact a Credit Counseling Company
Credit counseling companies are typically nonprofit organizations that offer services and advice to help you manage your money and debts. Many of the services are free, including virtual or in-person sessions to discuss your financial situation and help you develop a personalized plan.
2. Create a Budget and a Financial Plan
Make a list of your current debts, income and expenses. It’s important to take a comprehensive look at your financial situation, especially when you start working on your money management skills.
3. Prepare Your Negotiation Strategy
Before you contact your creditors, gather all the information you’ll need to support your request. Be prepared to explain why you haven’t been able to pay off your debts and how much you’ll be able to afford to pay going forward.
You might consider bringing up the fact that you’re thinking about bankruptcy. Although a settlement might pay your creditors less than what they’re owed, bankruptcy usually pays them nothing — so they could be more willing to negotiate.
4. Contact Each of Your Creditors
If you haven’t defaulted on a credit card or loan yet but cannot make the payments, it’s best to try settling before your debt is sent to collections. Once a debt goes to collections, it will significantly affect your credit score.
5. Get an Agreement in Writing
Before you start making any payments on your outstanding debts, get a written agreement from the creditor that shows the specific repayment terms. Should anything come up in the future regarding the debt, you’ll have proof that you paid.