SimplyFinance

What You Need to Know About Debt Settlement

With more and more people charging purchases, borrowing regulations being loosened in reaction to the demand, and inflation on the rise, lending institutions have sought out ways by which borrowers can work with them towards debt settlement instead of declaring bankruptcy. This scheme, however, is generally not available on secured debts, where repossession is practiced.

Debt Settlement is one road towards debt reduction. In general, you will lower the amount of the debt you owe, with lenders often willing to take a smaller amount monthly instead of nothing at all. In most cases, you stop making monthly payments on your debt for a time, allowing you to save. Once you have saved a certain percentage of what you owe, you then negotiate a settlement schedule with your lenders. Usually, your payment will be worked out over a two or three year time frame.  

Working directly with the lender is advantageous in that you do not involve a third party, who will obviously want a part of the money involved in the debt settlement. However, sometimes it is a good idea, or even mandatory, to involve a debt settlement company.

If you are in debt and over your head, you may want to consider debt settlement. There are several online debt settlement tests through which you can calculate if you qualify for debt settlement or not. Commonly asked questions are: to how many companies do you owe money, how much are you currently paying towards debts each month, what is your monthly income, what are your total monthly expenses, and how much can you comfortably pay towards debt settlement each month. As cited by Yahoo Finance, “according to David Leuthold, vice president of the Association of Settlement Companies (TASC), about 40 to 60 percent of those who approach a (debt) settlement company are considered eligible based on their debts and personal financial situation.”  This means that you have too much debt to handle with your current income situation, cannot make the minimum payments, and have actually stopped payment.

If debt settlement is the route you take to avoid bankruptcy, there are a few things to consider: damage to credit, cost, collection calls, lawsuits, and tax consequences. Even so, debt resettlement is often a much better route for your credit history in the long run. Remember that debt settlement is a service for which you must pay. Sometimes you pay a percentage of the total amount owed before debt settlement, and other schemes charge you a higher percentage of the reduced amount.