Turbo Takeaways
- Debt settlement is an effective way to pay off large debt balances from credit cards and personal loans.
- Consumers can choose to contact creditors on their own or leverage the expertise of a debt settlement organization.
- Although your credit score typically drops during the settlement process, this debt relief method usually helps consumers save money and pay off debts faster.
What Is Debt Settlement?
Debt settlement is a form of debt resolution designed to pay off 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 negotiate with creditors on your behalf to settle your account in return for a lump-sum payment to the lender. This negotiated payoff is typically much 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, such as credit cards and personal loans. However, it’s always best to speak with a professional to determine if this is the best 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:
- Complete a Debt Assessment
Start by reviewing your income, expenses, and debt-to-income ratio, listing all unsecured debts (credit cards, personal loans, lines of credit, etc.). If you owe under $10,000 in unsecured debt, other debt relief options may be a better fit, while balances over $10,000 may make enrolling in a debt settlement program worth considering. - Make Monthly Payments
After enrolling in a debt settlement program, you'll stop paying your creditors directly and make one monthly payment into a dedicated account administered by the settlement agency. These payments are usually lower than what you’re paying now and are used to build the lump sum needed to settle your debts. - Begin Negotiations
Once enough money is saved, the settlement agency negotiates with creditors to secure the largest possible reduction, leveraging its expertise to effectively explain your situation. Their goal is to secure the best settlement, helping you save the most and potentially reduce your debt by up to 45%, depending on your finances, history, and credit reports. - Finalize Debt Repayment
After completing negotiations, the settlement company repays your creditors out of your savings account. Now that you've resolved your accounts to a zero balance, you can start fresh with a clean financial slate.
What Happens After Debt Settlement?
Once your creditors are paid off, your accounts will be closed, and you'll 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 repair 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
Use funds you'd pay towards debt to save and invest for the future. Establish an emergency fund (using a simple bank savings account) with at least three to six months of living expenses. Having an emergency fund helps you cover any unexpected expenses that may arise.
Pros and Cons of Debt Settlement
Pros
- Repay debts faster
- Delay or halt debt collection efforts
- Avoid bankruptcy
Cons
- High fees and scams
- Lowered credit scores
- Taxable income
Benefits of Debt Settlement
Settling debt for less than what you owe is one major benefit of this debt relief method, but there are also several other benefits to consider, including:
- Pay Off Your Debts Faster
Compared to other debt relief programs, such as credit counseling and debt management plans, settling debt is a faster process. Effective settlement programs allow you to pay off all your debts in 24 to 48 months. - Get a Reprieve from Debt Collectors
Once your settlement is complete, your account will be closed. This means that you’ll no longer receive any calls from debt collectors. For many people, getting a reprieve from the intimidating collection calls is the biggest benefit of debt settlement. - Avoid Filing for Bankruptcy
Negotiating a settlement helps consumers overcome heavy balances without filing for bankruptcy. Although your credit score may drop for a time during settlement, you can recover faster than the years it often takes after declaring bankruptcy.
Risks of Debt Settlement
Here are a few of the risks involved in the process of settling debt:
- High Fees and Scams
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. Beware of scams! Legitimate companies won't charge fees before completing negotiations on your behalf. - Negatively Impacts Your Credit Score
During the settlement process, your credit scores may drop, especially at the beginning. This happens because you'll typically stop paying your debts while you save up enough in your settlement account to make your lump-sum payment. - Taxable Income
When you settle your unsecured debt for a reduced amount, you'll typically owe taxes on the amount of your forgiven debt. Forgiven debt is taxable as ordinary income according to the IRS.
Debt Settlement Q & A
Can a Debt Settlement Company Help You Clear Debts?
Settlement can be an unfamiliar and intimidating process. A debt settlement company acts as a bridge between you and the collection agency. Experienced debt relief agents can guide you through the process and help you reduce your overall debt.
When you enroll in a debt settlement program, you don’t have to worry about contacting debt collectors. The organization negotiates and handles all communications on your behalf. They’ll also provide you with an action plan to clear debt as quickly and effectively as possible.
After working with a settlement company, you’ll pay a fee based on your total enrolled debt (the amount of debt you have when you start the program). Fees range from 15% to 25% of your enrolled debt. Legitimate organizations only charge fees once an offer is accepted by your lender, your debt is settled, and your account is closed.
How Is Your Credit Score Affected by Debt Settlement?
If your account is already in collections, it may be time for you to consider debt settlement to permanently pay off your accounts.
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 over time.
In most cases, settling debt 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 have already been significantly diminished.
Can You Settle Debt by Yourself?
Borrowers may choose to settle their accounts themselves. However, this process requires planning, discipline, and confident negotiation skills.
To complete a DIY debt settlement, start by contacting each of 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 several factors, such as whether your account is already delinquent and if you can prove you’re facing legitimate financial hardship.
When pursuing this option, it’s also crucial to create and follow a plan and focus on strategies to prevent you from getting back into debt. Working with a professional debt settlement agency like TurboDebt® can make this process easier and help eliminate stress.
What Are the Alternatives to Debt Settlement?
If you think debt settlement isn't the right option for you, consider the following alternative debt relief options:
Debt Consolidation
If you carry debt from multiple sources, you could combine 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 with a lower APR. You can then use those funds to pay off all your smaller existing debts. This fixed-rate debt consolidation loan is easier to secure with a good credit score.
This process allows you to save a considerable amount of money, especially if you carry a significant amount of high-interest debt.
Debt Management
You can also enroll eligible debts into a debt management program. Once enrolled, you'll make a single monthly payment that's distributed to your lenders on your behalf, ensuring your bills are paid in full and on time.
Debt management is particularly helpful for those with poor credit because it doesn't 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 and penalties.
Credit Counseling
Sometimes, all you need is a little guidance to create a debt repayment plan that fits your unique financial situation. A nonprofit or private credit counseling agency can help you by reviewing your finances and advising you on the best options for handling your debts.
Many of these organizations also offer debt management services. A credit counselor often sets up your monthly payment plan once you enroll in a program.
Bankruptcy
If you've exhausted all other solutions, bankruptcy may be your last option to relieve debt.
With Chapter 7 bankruptcy, you can eliminate most types of debt, including credit cards, personal loans, and medical bills. However, this option may require debtors to sell off assets to repay lenders.
Some consumers file Chapter 13 bankruptcy, which involves adhering to a court-ordered repayment plan but avoids selling assets to pay creditors.
In both cases, this debt relief option does not eliminate back taxes, student loans, child support, or alimony obligations.
Bankruptcy is a complex, lengthy, and expensive legal process. It also negatively impacts your credit report for up to ten years. Before filing, it's important to consider these factors and consult with a bankruptcy attorney.
Enroll Your Debts With TurboDebt®
Now that you know how debt settlement works and what it involves, take the next step and contact a reputable debt relief company like TurboDebt®.
TurboDebt offers a free consultation and customized programs to help you create an affordable repayment plan. We advise you on the best debt relief options to help you achieve your financial goals.
With over 20,000 positive reviews across Google and Trustpilot, we've proven ourselves as a trusted partner for debt relief. Contact the experts at TurboDebt today for a free consultation!