If you're knee deep in debt, cannot pay your bills and wish to avoid collection
calls, you may consider debt settlement
(also known as debt negotiation).
This is when you negotiate and reduce the outstanding debt by 40-60% of the amount
you owe. The creditor forgives the remaining debt thereby helping you to get
out of debt faster.
With proper help you can
Lower your monthly payments
Reduce interest rates
Waive late fees
Eliminate collection calls
Avoid bankruptcy
Have only one monthly payment
Become debt free
How settlement (or credit card debt settlement) works
Debt settlement companies offer a
settlement program wherein they negotiate with
your creditors/CA in order to settle the debt for less than what you owe.
The companies charge an upfront fee for their services. Given below is an
example of how debt settlement or
credit card debt settlement
works.
How credit card debt settlement works - An example
Let's say Jesse owes a total debt of $100,000 on 5 credit cards. She is finding
it difficult to keep up with the minimum payments. She has earlier consulted
a credit counseling
agency but the monthly payments they negotiated with her creditors
were too high for her to pay. Jesse doesn't want to file
bankruptcy as she
does not want to involve the court. So, finally Jesse ends up working with
a credit card debt settlement company XYZ. Here are the 4 steps on how Jesse
could settle credit cards and pay off her dues.
Stop payment to creditors: The representative at the credit
card debt settlement company asks Jesse to stop paying her creditors and deposit
a certain amount monthly into a savings account (i.e. a trust account that XYZ creates
for Jesse).
No more handling of collection calls: While Jesse starts
falling behind on her payments, she may receive collection calls, which are effectively
handled by the representative. Jesse doesn't have to handle such harassing
calls on her own.
Negotiation starts soon after: As Jesse accumulates good
amount of dollars into the trust account, the representative at the credit card
debt settlement company starts negotiating with her creditors one by one.
Debt is reduced by 40-60%: Finding that Jesse won't be able
to pay enough; her creditors agree to accept a reduced amount, say around 40-60%
of her outstanding bills.
While Jess pays off one debt, she waits for better offers from other creditors.
She makes sure that any extra money coming in would be used to pay off her bills.
Finally, after a period of 2 years, Jesse is able to settle credit cards debt with
all her creditors.
Whether it's a credit card debt
settlement program or one which includes other dues,
you should stop paying your creditors initially. Instead, send in those payments
to your settlement company. Otherwise, you cannot gather enough funds to settle
credit cards dues and other bills.
Once you have enough funds deposited into the trust account, debt settlement (or credit card debt settlement)
companies negotiate with your creditors/CA and attempt
to stop all collection efforts.
Debts you can settle
Credit card debt settlement
is quite common. Other than unsecured credit cards,
medical bills, gas/store cards, personal loans etc can also be settled. But
tax debts, alimony, child support, mortgages, car loans and federally insured student
loans are excluded from a settlement program.
How much to pay for settlement
Debt settlement companies charge 25-35% of the debt balance that is forgiven under
the program. The fees are based on:
How much you owe in total
Number of debt accounts you have
How much you'll save by settlement
How long it takes to settle debts
It usually takes 2-4 years to complete a
credit card settlement program or settle
personal loans, medical bills and other dues. The period of completion depends
upon your total
debt amount.
Creditors may not sue after settlement
Once you negotiate debt settlements with your creditors/CAs, they may not come after
you for the balance. It is illegal in many states such as Arkansas, Texas,
Georgia, Michigan, Washington etc.
However, in other states such as Alabama, Delaware etc, the creditor retains his
right to sue you under certain conditions.