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Debt Settlements Explained

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Debt settlement could be the route you take to get out of debt. This method is an option for many people, but it is not always the right option. If you are considering whether settling your debt is a good option, you have to know how it works, why it works and how to improve your situation. Settling a debt means that you will approach a lender and ask to close out the debt for less than what is owed. Some lenders are not willing to work with you while others may. Every situation is different.

Hiring or Do It Yourself

One of the first things to consider is whether you should hire a third party to handle the debt settlement process for you. There are good and bad things on both sides of this coin. Some debt settlement companies are attorneys who specialize in helping individuals to get out of debt. The advantages of using this service are numerous:

  • Their professional abilities and skills make it more likely that lenders will work with them to settle your debt.
  • They can handle the legal processes and contracts required to ensure that the settlement is legitimate and that lenders cannot come after you later for more money.
  • A debt settlement company may already have working relationships with many of your lenders, making it more likely, that you can achieve success with the program.
  • In some cases, these companies can get the lender to reduce what you owe by 20 to 50 percent, depending on the circumstances. This may be more than you can do on your own.

In some of these programs, the company will work to collect a monthly payment for you. This payment will collect in an account with the company until there is enough in the account to approach a lender to settle the debt. Keep in mind that you will pay fees for using this service as well, and those fees can be one of the biggest reasons why some people want to do debt settlements on their own.

If you plan to work on debt settlements on your own, it is a good idea to focus primarily on the actual abilities that you have. You will need to contact each of your lenders directly. You will need to tell them why you cannot make payments on your own. You will then need to negotiate a settlement, based on what you have available to settle the debt with. In many cases, the inexperience of a consumer handling these negotiations can stop the lender from agreeing to work with you. If you do go on your own, you will need a letter in writing from the lender stating that they agree to settle the debt for less.

How to Make it Work

How can debt settlement, in either method, work for you? In this method, you will approach a lender and negotiate a payoff amount. If you owe $1,000 to the lender, for example, you may not want to keep paying the interest and monthly fee on the debt. You approach the lender and negotiate the debt down. You may be able to pay $750 to pay off the debt in full. You no longer will owe the company any money.

However, in order for such an offer to be acceptable to the lender, you will need to have the money on hand to make the transaction happen. In the above example, the lender will expect to be able to receive the $750 immediately to close out the account. In some cases, perhaps for a little less off, the lender will accept the payment over three or a few installments. For example, the lender may agree to settle the debt for a series of $200 payments over four months. It is up to you to find the right method of negotiating the debt.

What You Should Know About Debt Settlements

You should know a few things about debt settlement before you actually go through with this process. Debt settlement can work very well, but there are a few situations where it may be best to continue making your payments as is.

  • Debt settlement agreements are not something a lender has to agree to. There is no way to know if a lender will accept your offer until you ask them.
  • Many lenders will only accept these offers if they know you are at the end of the line and are unable to keep paying your monthly bills. They may fear that not accepting the offer could mean you will file bankruptcy.
  • You need to get everything in writing before you agree to send money to the lender.
  • If you get into a monthly agreement to settle the debt and fail to make those payments, the lender will revert to coming after you for the payment in full.
  • Debt settlement can have a negative impact on your credit score. You are not paying your lender according to the terms you agreed to. Therefore, the lender may note this with the credit bureaus. However, settling the debt often is better than carrying the debt over the long term especially if you are considering bankruptcy or are unable to make on time payments.

Should you use debt settlement? It can be a good option for many people if you are struggling to make your payments. However, it can be difficult for those who have no way of coming up with the larger monthly payments. Some people will use a tax return to pay down debts. Some may even borrower to do so.

Consider the consequences of taking this action. Determine if debt settlement, either on your own or with a lender is right for you. Then, take action and stick with the plan. That way, you are well on your way to protecting yourself over the long term financially. For many people, this is necessary in order to avoid bankruptcy or to get out of debt sooner.

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