How Debt Settlement Can Get You Out of Debt
10 MIN READ
Published April 06, 2023 | Updated February 09, 2024
Like millions of Americans, if you are feeling overwhelmed with debt, you may want to consider debt settlement. You may be able to clear your accounts and save up to 50% on your original debts when you choose this option.
The Covid-19 pandemic, rising inflation, and the volatile economic climate have led millions of Americans to sink deeper into debt.
Trying to stay afloat is a challenge in itself, let alone paying off debt.
In 2022, the household debt in the U.S. rose to over $16 trillion compared to $13 trillion in 2019. Credit card balances recorded their highest-ever quarterly growth on record at $986 billion.
Like 18 million people in the country, if you are behind on your credit card payments, it may be time for you to consider debt settlement.
What Is Debt Settlement?
Debt settlement is a form of debt resolution help designed to resolve your outstanding debt for less than what you currently owe.
A debt settlement company can negotiate with your debt collectors by offering a lump-sum payment or term specific settlement payment arrangement over time. Creditors then decide if they want to accept the settlement.
According to the American Fair Credit Council, debt settlement is the cheapest option to pay off your outstanding debt compared to credit counseling or debt consolidation.
The report also states that in 98% of cases, the reduction in the client’s debt is greater than the fees charged for the service.
For every $1 fee you pay, you can save $2.64 on your debt. If you are struggling to manage your debt currently, you may want to discuss your options with a professional.
How Debt Settlement Works
Debt settlement is a fairly straightforward process. If you are considering this option, here’s what you can expect.
Assessing Your Debt Situation
The first step in the process is to take a deeper look at your finances to assess your debt situation.
Make a list of all your debts, including credit card balances, lines of credit, personal loans, and anything else that you owe.
Once you have a list of your total debts, take a realistic stock of your resources. If you do not have a lot of debt, you might be better suited for other debt-relief options. If you have debt over $10K, you may want to look into a debt settlement program.
Choosing a Debt Settlement Company
The next step is choosing the right debt settlement company and speaking to a representative. Look for a company with a good reputation and positive reviews.
Ensure that the company offers debt settlement programs for the state you reside in.
If the company offers a free consultation, take advantage of it to learn more about its process and fees. Ask questions and make sure you are on board with everything before you sign up for the settlement process.
Setting Up a Debt Settlement Account
Once you've enrolled in a debt settlement program you will stop paying your creditors and begin making payments into a settlement account. Once you have accumulated enough funds in your settlement account the debt settlement company will begin negotiations with your creditors.
You'll be making one single payment a month towards your settlement account and typically that payment is much lower than what you are currently paying out each month. As a result, you'll start to save money as well.
Negotiation With Creditors
The debt settlement company you work with will negotiate with creditors on your behalf. Their goal is to reduce the amount you owe to your lenders.
Their expertise will help them secure the best possible settlement for you so you can save money.
Depending on your financial status, history, and credit reports, you may be able to save as much as 40%-60% of what you owe. This can be a significant advantage as you’ll be able to pay off your debts faster.
Paying Off Your Debts
The amount you have been depositing in your settlement account will continue to accumulate over time. These funds will then be used to pay the agreed settlement amount to each of your creditors.
One by one, you’ll see your debts paid off, and at the end of this process, you can start with a clean slate.
Once Your Accounts Are Settled
Once your creditors are paid off, your accounts will be closed, and you will be debt-free.
After the burden of debt has been lifted off your shoulders, it is time to start rebuilding your finances. Take this time to rebuild your credit by:
- Paying all your bills on time
- Creating and sticking to a budget
- Avoid using credit
- Saving for the big purchases
Now that you don’t have to pay your debts, use those funds to save and invest for the future. You’ll be on the path to financial stability.
What Is a Debt Settlement Company
A debt settlement company can be a bridge between you and the collection agency. Settlement is an unfamiliar and intimidating process.
An experienced company can guide you through the process and help you reduce your overall debt.
When you work with a debt settlement company, you will pay the company a fee calculated on your total enrolled debt.
Similar to debt mediation, upon entering the program, the amount of debt you have is called enrolled debt. This fee can only be charged once your debt is settled. Fees are usually 20% to 25%.
Once the debt settlement agreement is finalized, you can make monthly payments into a separate savings account. These funds will then be used to make either a lump sum payment or monthly term payments to your lenders for settlement.
A debt settlement company can use its negotiation skills to help you resolve debt faster and pay less on your total debt.
What Percentage of a Debt is Accepted in a Settlement
There is no general rule that can be applied to all lenders when you make a settlement proposal. A good debt settlement company can typically negotiate for a lower payoff of 40%-60% of the total balance.
This is one reason why working with a reputed debt settlement agency is so important. Depending on your unique situation, a company can help you settle your accounts for up to 50% of your original debts.
Whether you have credit card debt, medical bills, or personal loans, debt settlement can help you resolve your obligations. Most unsecured debt will be eligible for debt settlement programs.
How Your Credit Score is Affected by Debt Settlement
If your account is already in debt collection, it may be time for you to consider debt settlement to settle your accounts permanently.
While debt settlement can have a negative impact on your account, it does help you become debt-free and settle your accounts for much less than what you would have paid otherwise.
In most cases, debt settlement is considered by those who are already past due on their accounts, have incurred late fees, and have failed to make payments for multiple payments. By this point, your credit score will already be diminished.
Do-It-Yourself Debt Settlement
Many borrowers choose to settle their accounts themselves, but it requires planning, discipline, and advanced negotiation skills.
DIY debt settlement requires you to start by contacting all your lenders. You can then craft a settlement offer and negotiate with your lenders and credit card companies.
Whether they accept your proposal will depend on a number of factors, such as whether your account is already delinquent and if you can prove financial hardship.
If you are considering going this route, it is also crucial to ensure you stick to the plan and work on strategies that will prevent you from getting into debt again.
Working with a professional debt settlement agency like TurboDebt can make this process much simpler and stress-free for you.
Benefits of Debt Settlement
Being able to settle your debt for less than what you owe is a major benefit of debt settlement. But there are also several other benefits to consider.
- When compared to other debt relief programs, such as credit counseling and debt management plans, debt settlement is much faster. A good settlement program can allow you to pay off all your debts in 24 to 48 months. Other debt relief programs typically take longer. One of the biggest benefits people experience from this expediency is freedom from their unrelenting anxiety.
- Debt settlement can lower debt balances and, in some cases, reduce interest charges and waive fees. Overall, this will allow you to save a considerable amount of money. The savings you enjoy can be allocated towards things that are important to you.
- Once your settlement is complete, your account will be closed. This means that you will no longer receive any calls from collection agencies. For many people, getting a reprieve from the intimidating collection calls is the biggest benefit of debt settlement.
- For those with overwhelming debt, debt settlement can help avoid bankruptcy. Negotiating a settlement can provide you with the breathing room you need. It can help you avoid bankruptcy and keep creditors from suing you to recoup their losses.
Risks of Debt Settlement
Like any other debt relief program, it is important to have a clear understanding of debt settlement pros and cons. There are a number of advantages to considering this program, as discussed above.
Here are a few of the risks involved in the process that you should be aware of:
- The fees charged for debt settlement services vary. If you are not careful, you may end up working with a company that charges high fees, wiping out much of the savings from your settlement.
- Your credit scores may be reduced, especially at the beginning of the debt settlement process.
- When you settle your debt for a reduced amount, you will have to pay taxes on your savings. The IRS considers forgiven debt to be taxable.
- Even if a debt settlement is working in your favor, you still risk being sued.
Alternatives to Debt Settlement
If you think debt settlement is not the right option for you, many other alternative debt relief options are available.
If you have multiple sources of debt, you can combine all of them into one with a debt consolidation program. A balance transfer credit card or debt consolidation loan can help you do that.
A debt relief company can help you find a loan at a lower APR if your credit history is good. You can then use those funds to pay off all your existing debts.
This will allow you to save a considerable amount of money, especially if you carry a lot of high-interest debt. Debt consolidation also makes repayments easy and stress-free.
With a debt management plan, you can enroll all your eligible debts into the program. Once enrolled, you can make a single payment each month which will be distributed to your different lenders.
Debt management is particularly helpful for those with poor credit because it does not involve getting a new personal loan or balance transfer credit card.
A debt relief company can also negotiate with your lenders to reduce your interest rate or waive fees or penalties.
Sometimes all you may need is a little guidance to come up with a debt repayment plan that fits your unique financial need.
A nonprofit and a for-profit credit counseling agency can help you. A credit counselor can take a look at your entire financial situation, your debts, and your budget.
They can then suggest the best course of action and create a personalized payment plan so you can pay off your debt faster.
If you have exhausted all your other options, bankruptcy may be the last resort.
With Chapter 7 bankruptcy, you can eliminate most types of debt, including credit cards, personal loans, and medical bills. Bankruptcy does not eliminate back taxes or student loans.
Bankruptcy is a complicated, lengthy, and expensive legal process. It will also have a major negative impact on your credit report, so it should only be considered when there are no other solutions available.
Now that you know how debt settlement works and what it involves, the next step is to contact a reputable debt settlement company to help create a settlement plan.
TurboDebt offers counseling, consultation, and planning services to help you create a feasible debt relief and repayment plan.