Debt Reduction through Debt Settlement
You have most likely heard of debt settlement programs, they are the ones that often make claims of reducing your debts by 70% or more. Although the debt settlement industry is taking some heat due to a large number of complaints, there is no discounting the fact that debt settlement is a strategy that works. Realistically, you can get out of debt for about 60%-70% of what you owe at the time of enrollment.
Debt reduction through settlement of debts has been around for a very long time, and in fact, predates consumer credit counseling. The bottom line is that for a debt collector trying to collect on a delinquent debt, making an agreement to settle an account for less than what is owed is simply good business. Especially when the collector may have purchased the account from the original creditor for only 15 to 30 cents on the dollar.
The Process of Debt Settlement
The process begins when you can no longer make your minimum payments due to a financial hardship. A financial hardship can be an unforeseen medical issue, loss of job, reduced income, or simply overspending and poor money management. However, in order to qualify for the program, you must still have enough income to make a qualifying reduced monthly payment.
After a consultation with a debt advisor, if it is determined that debt settlement is a good option for you, you will complete the enrollment process and begin making your reduced monthly payment into the program.
The basic way that debt settlement works is simple. You can no longer maintain your minimum payments, so instead a debt advisor tailors a plan where you make a greatly reduced monthly payment into a settlement savings account, while allowing your accounts to continue to go delinquent. Your settlement savings account will accrue a growing balance over time. As your accounts are charged off, your creditors will become willing to negotiate reduced payoff amounts. Negotiators will settle the accounts one at a time from funds collected in your settlement account. Fees for the program will be also paid out of the monthly arranged payment. Fees are usually paid out over the first 9-18 months of your program.
Now here is what you need to know about debt settlement to successfully complete the program and end up out of debt.
- 1. Dealing with collection calls
There is little to nothing that any company can actually do to stop debt collectors from calling you, and if they tell you they will stop the calls, you should question if you are working with the right company.
The bottom line is you are not paying your minimum payments and you will get collection calls. How you deal with those calls means everything. The best advice is to take the calls and simply tell the collectors that you are in a financial hardship and do not have the ability to make any payment at this time. They will try to solicit more information from you, but you need to leave the conversation at that. It is also advised that you do not mention that you are in a debt program of any kind. If you tell a collector that you are putting aside funds to settle all your accounts, they will try to intimidate you into sending them all the money. Once you have been in a debt settlement program sufficient time for funds to accrue towards settling debts (typically 8-12 months), you can tell collectors to call your debt negotiation company to work out settlements. By this time, your accounts will typically be charged off and with a 3rd party collection company. They are usually more than willing to settle.
Debt collectors can be very intimidating at times; if you let them. They may threaten to take you to court, garnish your wages, or even come to your home. The fact is that even though anyone can sue anyone in this country, lawsuits cost money and are an absolute last resort. The reason they threaten, is because the threats work. People, when threatened with a creditor lawsuit, will pay their credit card instead of buying food for their family. You need to simply ignore these threats and stick to your plan. In the event of an actual creditor lawsuit, they will often still accept a settlement instead of following through on the expensive legal path.
Once a debt has been charged off and is sold or assigned to a 3rd party collection company, there are specific laws that protect you from creditor harassment. The Fair Debt Collection Practices Act (FDCPA) allows you to request that a collector only communicate with you in writing. They are also not allowed to call you at your place of employment once notified. Using this information can allow you to reduce the collection efforts substantially.
Collection calls will come and go, and are typically heaviest at the beginning of delinquency and again just prior to accounts charging off. There may also be long periods of no collection activity at all. Keep in mind that only a small fraction of debt settlement companies will even give you this information. - 2. Understand the fee and program structure
Most debt settlement programs are similar in the way they are structured, but the fees they charge can be all over the map. It is recommended that you only work with a company that charges fees in accordance with the guidelines below:
Service Fee: This will be a percentage of your total enrolled debt. This fee should be somewhere in the 10-15% range depending on your state; but not more than 15%.
Monthly Fee: This is a small monthly fee in addition to the service fee that should not exceed $95 per month.
Percentage of debt collected for settlement: This is really important. If a company is not collecting at least 45% of your total debt to be set aside for settlement, you should consider finding another company. Often when less than 45% is put into your settlement savings account, it is not enough to settle all your accounts and you will be required to come up with additional funds down the road. This often causes further hardship and should be avoided. - 3. Check out the company before you sign up
It is always a good idea to learn a little about the company you are considering enrolling with. Over the years there have been many debt solution companies come and go; many of which left a lot of customers hanging mid-way through their program. It is pretty simple to check a few key things about a company before signing your enrollment packet:
Check them out with the BBB. follow this link and type in the name of the company. Be sure that your results match since many companies have similar names: bbb.org/us/Find-Business-Reviews/
Check them out with ChoiceREVU. ChoiceREVU is a major consumer/expert revue site and provides a lot of great information about debt management companies. DebtConsolidationServices.ChoiceREVU.com - 4. Stick with your plan
Debt Settlement is the best way to avoid bankruptcy and get out from under overwhelming debt in a short time-frame. Once you have made an informed choice and enrolled into a debt settlement program, you need to stick with it. If you cancel your program after 12 months, you will usually get the balance of your settlement savings account back, but you will most likely lose the money you paid in fees. No debt solution is easy, and you will have to go through some pain to get out from under the debt you created. Be patient and strong, and you can get out of debt for a fraction of what is currently owed.
Consumer Comments
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