Debt Settlement

Debt Settlement [Pros and Cons of Debt Settlement Companies 2021]

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Debt Settlement

At some point in our lives, taking on some debt is going to be inevitable, from credit cards to auto loans and mortgages. Unfortunately, in many cases, a mass of debt can pile up quicker than expected. This can leave you with a level of debt that seems impossible to pay off. Fortunately, there are some options that have been created to help people get rid of their debt when all seems hopeless; some of these methods, such as debt settlement, may enable you to shed your debt at a discount, too. 

Dealing with your debt, whether through debt settlement or other means, can give you a major relief to your financial life though it does pose some potential issues. Understanding these issues before going into the debt settlement is going to be vital to staying on track to reach your financial goals. 

If you have found yourself in a situation where you feel that you may not be able to pay off your debt, then you should consider debt settlement. While the debt settlement process isn’t for everyone, it can be an effective means to get out of debt. 

Let’s take a close look at the overall debt settlement process, so you can determine whether or not it is a good choice for you. 

Debt Settlement Pros and Cons

The pros and cons of debt settlement programs:

Pros

  • Debt settlement specialists may be able to reduce the overall amount of debt you have outstanding to creditors; in some cases, they may even be able to get the debt forgiven.
  • The debt settlement process takes the stress and burden of negotiating with creditors off of you and puts it into the hands of a trained specialist acing on your behalf. 
  • Borrowers gain the advice and support of financial experts in the debt settlement process. 

Cons

  • There are no guarantees that the debt settlement specialists can negotiate better deals with your creditors.
  • The debt settlement process may temporarily lower your credit rating. 
  • Debt settlement isn’t a viable option if you do not have a consistent enough income to make debt payments or accumulate cash. 
How Does A Debt Settlement Work?

How Does Debt Settlement Work?

The end goal of debt settlement is to negate the debt that you owe with a lump sum payment and negotiate it down with your creditors so that the payment is less than what the debt was originally owed. For example, if you have $100,000 of debt and you manage to accumulate $75,000 in a savings account specifically tailored towards that debt then the debt collectors may accept that $75,000 lump sum payment and call it even. They may also accept lower monthly payments to pay the debt off as well. 

This means that when you start working with a debt settlement company, you’d be able to stop making payments on the unsecured debt that you owe. From there you’d put that money that you would be paying your debt off with and place it in a savings account that is specifically tailored towards paying that lump sum payment. 

Once you have accumulated a certain amount of money in that savings account then your debt settlement company will contact your debt collectors and negotiate your overall debt cost down to the amount that is saved up so you can pay the lump sum and then be out of debt. 

This is a process that can have a huge benefit for your family if you are carrying a mass of debt that at the moment seems insurmountable. There are many debt settlement companies that have managed to help families get out of debt when they thought would be carrying a massive debt burden for the rest of their lives. Every situation is going to be different though, so many of these companies offer a free consultation to go over the specific situation that you are in and what the best plan for you will be. 

RELATED: What Is Debt Consolidation?

How to Get Into Debt Settlement

In order to get into a debt settlement, you are going to have to contact some debt settlement companies, such as National Debt Relief. There are many out there that ultimately offer unique features. Just about all of the companies will offer you a free consultation in which you can discuss your current situation. This will allow them to give you structured advice on what some of the best options are for you. 

Once you have gone through the consultation period, the debt settlement company will set you up with the savings plan that you will eventually put towards your debt. This is essentially a forced savings account because they make you pay a monthly premium, but it all goes into your savings account. 

Over time, you will notice that you are accumulating a nice amount of savings. When a certain threshold is hit, your debt consolidation company will start negotiating some terms with your lender. 

There are certainly some downsides to going into a deal like this, but if it gets you out of debt there are some benefits that may outweigh those downsides. Depending on which debt settlement company you work with, there are likely to be some criteria to hit before being able to work with them. Many of these companies require that you have a minimum level of debt and have had that debt for a certain period of time. 

This varies by company, but many require a minimum debt level of $7,500. In addition to that, you may have to prove that you are behind on your payments. This can be done by showing the outstanding balances as well as analyzing your current monthly cash flow. 

Advantages of Debt Settlement

When you get into a debt settlement, the goal is to get yourself out of debt. When you are sitting with a pile of debt, you are likely going to feel a large mass of stress around your financial life. The good news about a debt settlement is that it can get you out of that debt. This will allow you to ultimately shift your focus towards saving and investing your money so that it works for you. 

Getting back to that clean slate with no debt is an incredible feeling. Sure, you are going to have to deal with some side effects from the debt settlement. Though being able to shift your financial focus to making your money work for you as opposed to against you is going to provide you with some notable benefits. 

Once your money starts to grow, you will likely feel very strongly about your financial situation. The debt settlement process can take a while, but the time is going to pass anyway so it is certainly in your favor to use that time accordingly. 

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Disadvantages of Debt Settlement

While a debt settlement can pose some benefits for your financial life, there are certain disadvantages that you are going to need to take inventory of. You are going to have to weigh your options to see what is going to be the best route for you. There are many people who have gone into a debt settlement and have come out happy with the results. Though you are going to have to make sure that you understand all of the downsides before you go into this. With that being said, let’s walk through some of the most notable disadvantages that a debt settlement can pose. 

How Does Debt Settlement Affect Credit Score

Credit Score

There are ultimately no two ways about it, you are likely to notice a slight downturn to your credit score when you do a debt settlement. The reason being is that a debt settlement is you admitting that you are incapable of paying off the debt that you took on, meaning that it is going to be harder to get credit companies to trust you in the future. 

Another thing that is taken into consideration with the credit score is the fact that you are going to be stopping your payments for an extended period of time. The credit score will continue to drop as you miss payments regardless of whether or not you are in a debt settlement plan. 

While this is certainly a disadvantage of a debt settlement, you have to take your future goals into consideration. If you are not a homeowner right now and aspire to be one, then this might not be a great idea for you. The reason being is that you are going to have a very hard time getting a mortgage after your debt settlement.

On the other hand, if you are already a homeowner and don’t see any situation in the near future where you will need to be taking out a new loan then a debt settlement may be a good choice for you. 

RELATED: How To Fix Yor Credit Score.

Interest Does Not Stop

There are some notable downsides to getting a debt settlement. You may feel a short-term relief in knowing that you are able to stop your debt payments in order to build up your savings account to make the lump sum payment. This is a much more viable option than trying to pay both at the same time. 

Though while this is going to be the best way to build up the savings, the interest on your debt will not be paused. This means that there is still interest that is being added to your credit which ultimately makes your overall debt higher. This can lead to a major issue if the debt settlement company is incapable of negotiating your overall debt down. 

RELATED: Debt Consolidation Vs Debt Settlement.

Is Debt Settlement Worth It?

It Might Not Work

There is no debt settlement company that can guarantee that you’ll get your debt settled. When a representative from the debt settlement company reaches out to your credit company, they may not be able to come to an agreement. This would ultimately mean that the debt settlement failed, and you still have to pay whatever it is that you currently owe. 

In this day in age, most companies won’t charge you anything if they cannot come to an agreement. Though it is important to remember that the interest does not stop, this means that you could go into all of this and if it fails then you will owe more than what you did when you started. 

This certainly makes going into a debt settlement risky, but you can lower that risk by working with some of the better companies out there. Checking reviews of the company before you contact them is going to be a great way for you to see their credibility as well as their success rates. 

RELATED: Curadebt Debt Settlement Review.

How Much Does Debt Settlement Cost?

Fees

Of course, nearly every debt settlement company is going to charge you a fee when you complete the deal. There is no other way for these companies to stay afloat. This fee can be looked at as either an advantage or disadvantage due to the fact that after the fee you still usually save a lot of money, but this is still something that you are going to have to worry about in the long run. 

The good news is that just about all of these debt settlement companies will not charge you anything until the negotiation is successful. This is great because it gives even more incentive for the representative to fight for the negotiation, otherwise, they will not get paid. 

They try to make the fees work in your favor, but it can still certainly be a nuisance to pay once you are working yourself out of debt. The bottom line is that there is no way around it, if you’re looking to get out of debt in this way then there is absolutely going to have to be a fee to pay. 

Debt settlement companies generally charge between 15% to 25% of your settled debts.

RELATED: How To Protect Your Credit Score.

Debt Settlement Parting Thoughts

Getting into a situation where your debt has piled up can be very stressful and leave you fearful about your financial future. Moreover, getting too caught up with debt can set you back years if you don’t set up a strategy for getting out of that debt. In many cases, debt settlement can be a great way to help you to get on the path to being debt-free forever. So, do a little research, and see if debt settlement is the right choice for your current financial situation. 

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