If you are in the unfortunate position of having significant debt, and can’t see how you’ll ever pay it off, you may be considering a number of alternatives. Before you go any further, consider this expert advice for debt resolution (also known as debt settlement) to make sure you understand this option, and if it could be right for you.
- understand what debt resolution or debt settlement means
- take time to understand the process
- evaluate your situation
- review the cost structure
- expect a lower monthly payment amount
- assume that bankruptcy is your only alternative
- expect a lack of consequences to your credit
- think it’s an easy fix
- overlook the importance of budgeting and financial management
- confuse debt resolution with debt consolidation or debt management
A debt resolution, or debt settlement, company works on the consumer’s behalf to negotiate lower total debt payments on amounts the individual owes to creditors of unsecured debt. Unsecured debt is not backed by any type of collateral or asset, and includes debt from sources such as credit cards, medical expenses and utility bills. While it is sometimes possible to negotiate directly with your creditors yourself, a debt resolution specialist will be able to leverage its relationships with creditors to get you the best deal (resolution), and in the most timely way.
A good provider will know how much each creditor is willing to settle for, and what terms they will agree to at different points in the process. During the process, these creditors agree to forgive part of the debt owed to them. The new amount you owe might be 40 to 60 percent of the original balance, so the savings can be significant. In some cases, you may pay the new settled balance over several monthly payments. Or you may pay off the reduced balance in a single lump-sum payment, depending on the terms of the negotiation.
Candidates for debt resolution/settlement usually have more than $10,000 in unsecured debt. They are struggling to make minimum payments, and might be considering filing for bankruptcy protection.
Debt resolution/settlement firms charge consumers a fee for their services. This is generally a percentage of the debt enrolled or a percentage of the debt reduced. Federal Trade Commission (FTC) rules state that fees can be charged only after the firm has successfully negotiated the debt on terms the customer has accepted. To accumulate the funds to pay creditors, you will deposit a certain amount each month into a dedicated account that you own and control. All reputable debt resolution firms will abide by the FTC regulations and not require any upfront or monthly fees. Fees should only be paid on the basis of results.
A good firm can negotiate significant reductions off the outstanding amount owed on most unsecured debts. This allows you to enroll in a program with a monthly payment amount that is usually significantly less than the minimum payments you had been making to creditors.
Many people who are struggling to make minimum payments think they might have to file bankruptcy. Debt resolution/settlement can offer a viable alternative to bankruptcy, as the programs often provide better repayment terms than do Chapter 13 bankruptcy filings. Debt settlement also does not leave a permanent bankruptcy judgment on your credit record.
While enrolled in a debt resolution/settlement program, you will be delinquent on the enrolled debts. This will appear on your credit report.
Late fees and interest will continue to add up. The process can take two to four years – faster than credit counseling, but still requiring a strong commitment. Collection agencies or creditors may still call you to pursue payment. Some creditors might even choose to take legal action for unpaid accounts. Your debt resolution/settlement provider should be able to support you through this process while negotiating on your behalf.
Debt resolution/settlement will not change your habits. You will need to learn good budgeting and other money management skills, and understand why you got into debt in the first place in order to avoid making the same mistakes again.
Debt consolidation refers to getting all debts “under one roof” and at a good interest rate. It does not solely refer to professional services; individuals can obtain funds in many ways to consolidate their debts. Debt management plans are offered by credit counseling agencies. These plans reduce interest rates only, not principal balances due. Credit counseling agencies do this because they have pre-arranged agreements with credit card companies to lower interest rates on existing debt to a creditor-issued concession rate.
Debt settlement, also referred to as debt resolution, is a serious process for people in serious debt. For those who qualify, it can provide significant benefits: lower monthly outlays, reduced debt, and the ability to resolve your unsecured debts in two to four years. If you do have serious debt, make sure to review the pros, cons, and also the alternatives carefully before making any decision.