Credit is a part of life. It’s how we make our biggest purchases and some of the smaller ones. Favorable features like zero interest, rewards points and cash back also render purchasing on credit more beneficial than paying with cash. When you’re approved for a line of credit, you’re entering a binding legal agreement, an agreement the majority of consumers have every intention of upholding.
Nevertheless, debt is a heavy burden that can very quickly spiral out of control. Whether due to a sudden illness, getting laid off or poor financial management, it’s not uncommon to find yourself unable to keep up with payments, which leads to late fees that can quickly max out your credit line, and before you know it the debt is in collection.
An Uphill Battle
Clawing your way out of the red is not only difficult but confusing once the issuing bank sells your debt to a collector or transfers the task of seeking payment to a third party. At this stage, to protect yourself, it’s imperative to track and confirm ownership of the debt since not everyone calling to request payment is legally authorized to clear the debt upon payment, and to secure all agreements with creditors in written form. Doing this with multiple creditors is a stressful process that’s prone to error. Instead, the best course of action is debt settlement.
What is Debt Settlement?
Instead of arranging payment plans to pay off the loans, it’s possible to negotiate deeply-discounted lump sum payments with creditors. This settlement option is available once the original bank determines full repayment is unlikely. Additionally, collection agencies purchasing debt do so at a fraction of the original amount and thus have a greater margin for negotiation. When coupled with the fact that collecting any amount is better than nothing, the outstanding balance can be reduced by as much as 50 percent.
Things to Know When Considering Settlement
Only unsecured debt, i.e., debt not tied to assets like a car or a house, can be negotiated into a settlement. Some examples are credit cards, payday loans and medical bills. Settlements also lower your credit score for a period, and the amount by which the outstanding debt is reduced becomes taxable income that must be reported to the IRS.
Overall, it’s a convoluted process that requires a back and forth with creditors and a lot of paperwork. An uninformed consumer can easily get trapped into submitting payments that are never applied to their debt. Companies specializing in debt settlement services are better equipped to help debtors navigate the process of negotiation, but it’s important to research your options before choosing who to hire. Note that all companies will require that you open and make contributions to an FDIC-insured trust account, which will then be used to pay off the debt once a target savings goal is met.
Here are some tips for choosing the right debt settlement company:
• Select a settlement company that collects fees for services rendered only after your debt is settled.
• Make sure they have a good reputation. These companies tend to already have working relationships with creditors and thus are in a position to negotiate a better deal.
• Request a detailed explanation of the fees and services.
• The company must offer a clear plan, including how much money is required before negotiations begin and how long the process should take.
• Make sure they provide all information and agreements in writing.
With a proper plan and the services of professionals to help you along the way, the path to fiscal health isn’t the long, winding road it otherwise could be. If you are in need of help with your debt, you can get started with debt settlement today.