What Is Debt Settlement?

What Is Debt Settlement?

Debt settlement is a form of debt resolution designed to resolve your outstanding debt for less than what you currently owe. You can work through the process of contacting lenders independently or with the assistance of a debt settlement company.

Debt relief organizations can negotiate with creditors on your behalf to settle your account in return for a lump-sum payment to the lender. This negotiated payoff is often substantially less than your current balance.

Settlement is often the most cost-effective way to get out of debt, especially if you carry high-interest unsecured debt, like credit cards and personal loans. However, it’s always best to speak with a professional to determine if it’s the right option for your financial situation.

How Debt Settlement Works

Debt settlement is a fairly straightforward process. Here’s what you can expect if you pursue this option:

Debt Assessment

The first step in the process is to take a deeper look at your finances to assess your debt-to-income ratio. If you work with a debt relief organization, you'll speak with a debt counselor and list everything you owe, including credit card balances, lines of credit, personal loans, and any other outstanding accounts.

If you owe less than $10,000 in debt, consider other debt-relief options. However, if you're carrying over $10,000 in unsecured debts, enrolling in a debt settlement program can give you the support you need to pay off your balances for good.

Monthly Payments

Once you've enrolled in a debt settlement program, you'll stop paying your creditors. Instead, you'll begin making payments into a debt settlement account, which is a type of escrow “savings” administered by the debt settlement company.

You'll make a single monthly payment that's typically much lower than what you're currently paying on your debts each month. As a result, you'll start to save money and build up your lump-sum payment.

After accumulating enough funds in your account, the debt settlement company will begin negotiations with your creditors. The organization will then use the funds in your account to pay each creditor a lump sum, thereby settling your debt.

Negotiations

The debt settlement company you work with will negotiate directly with creditors on your behalf with the goal of reducing the amount you owe to your lenders. If you work on your own, you'll speak to lenders yourself, asking to settle for the amount you can afford to pay. 

Debt settlement organizations bring the expertise in knowing who to contact and how to explain your situation using industry terms. This helps them secure the best possible settlement for you, allowing you to save the most money.

Depending on your financial status, history, and credit reports, you may be able to save as much as 50% of what you owe. 

Debt Repayment

As you accumulate enough to pay each debt, you'll resolve your accounts with a zero balance. At the end of this process, you'll start with a clean slate.

What Happens After Debt Settlement?

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. 

Here’s how you can rebuild your credit:

• Pay all your bills on time
• Create and stick to a budget
• Avoid using credit wherever possible
• Save for the big purchases
• Invest what you save

Now that you don’t have to pay your debts, use those funds to save and invest for the future. Establish an emergency fund (using a simple bank savings account) with at least 3-6 months of living expenses in it. You can use to cover any unexpected expense that may come up in the future.

By keeping a liquid reserve available when you need it, you’ll be back on the path to financial stability. 

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 debt 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’ll no longer receive any debt collector calls. 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 may help you avoid bankruptcy altogether and keep creditors from suing you to recoup their losses.

Risks of Debt Settlement

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’re not careful, you may end up working with a company that charges higher than normal fees, wiping out much of the savings you may realize from your settlement.
• Your credit scores may be reduced, especially at the beginning of the debt settlement process, as you will typically stop making payments on your debts while you save up enough in your settlement account to make your lump-sum payment. 
• When you settle your unsecured debt for a reduced amount, you will have to pay taxes on the amount of your forgiven debt. The IRS considers forgiven debt of this type to be taxable as ordinary income in the year your debt is relieved.  
• Even if a debt settlement firm may be working in your favor, you still risk being sued by a creditor for what you owe.

Can a Debt Settlement Company Help?

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’ll pay the company a fee calculated on your total enrolled debt.

Upon entering the program, the amount of debt you have is called enrolled debt. The fee (usually 15% to 25% of your enrolled debt) can only be charged once your debt settlement offer is accepted by your lender, your debt is settled, and your account is closed.

When you work with a debt settlement company, you don’t have to worry about communicating with debt collectors. They’ll negotiate and handle all communications on your behalf. They’ll also provide you with a clear action plan to clear off your debt as quickly and effectively as possible. 

A debt settlement company can use its negotiation skills to help you resolve debt faster and pay less on your total debt than if you tried to do it all yourself. 

What Percentage of a Debt Is Accepted in a Settlement?

There’s 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.

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 credit score, it does help you become debt-free. It also allows you to settle your accounts for much less than what you would have paid otherwise.

In most cases, debt settlement is a viable option for those who are already past due on their accounts, have incurred late fees, and have failed to make payments for several months. By this point, your credit score will likely already be diminished significantly.

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 debt settlement offer letter 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 you’re in the middle of a legitimate financial hardship.

If you pursue this option, it’s also crucial to 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.   

Alternatives to Debt Settlement

If you think debt settlement is not the right option for you, many other alternative debt relief options are available.

Debt Consolidation

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 fixed-rate debt consolidation loan if your credit history is good. You can then use those funds to pay off all your smaller 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.

Debt Management

You can also enroll all your eligible debts into a debt management program. Once enrolled, you can make a single payment each month. It'll be distributed to all your different lenders on your behalf, ensuring your bills are paid on time and paid to each lender in the proper amount(s).

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. 

Credit Counseling

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 or 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. 

Bankruptcy

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, nor does it eliminate child support or alimony obligations either. 

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.

Enroll Your Debts In a Debt Settlement Program

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. We provide multiple debt relief options so you can achieve your financial goals.  

Please reach out to our knowledgeable debt relief professionals for a free consultation today. Here’s what our satisfied clients are saying about our debt relief services.