Debt settlement options

Debt settlement is one solution used to reduce your outstanding debt. Either you or a third party negotiates with the creditors to lower payments and in some cases reduce the total amount of debt.

Whether a borrower decides to settle debts directly with lenders or through professional debt settlement firms they will have to set aside a certain sum of money to build up a settlement fund. The settlement company will require a limited power of attorney to act on behalf of the borrower and negotiate with the lenders.

After collecting a certain amount of money the borrower will negotiate with the lender to agree with the reduced payment amount. The negotiation amount generally varies from 25% to 50% of the outstanding balance, however some claim to reduce your debt by 70%. Once the lender agrees to the settlement amount the payment is arranged for making a full and final settlement.

Monthly payments can be made into the settlement fund to pay off the debt amount agreed upon. The lender then sends a letter to the borrower and the credit bureaus stating that the amount has been settled for less than the agreed amount.

Usually unsecured debts such as medical debts, credit card debts and others are negotiated in such a manner. In case of secured loans the lender has the right to seize the security in lieu of such loan.

Most third party debt settlement companies charge fees and it is not always apparent how much they charge so beware and read the agreement entirely and watch for hidden fees. However, you don't need to hire a professional to do this for you. Debt settlement has become so common and popular that many of the major credit card companies will offer settlements in order to cut their losses. Some settlements have been as high as 50% of the outstanding debt but the average is less than that. Using the do it yourself approach requires that you learn how to negotiate.

The fees debt settlement companies charge can be large, up front fees. The industry standard is 15%. So if you owe $100,000, then your fees would be $15,000. You have to evaluate if it is beneficial to learn how to negotiate with your creditors to settle debts yourself and save a lot of money, or if the amount of reduced debt is enough to pay for the debt settlement fees you pay.

Issues arise if you wait too long. The creditor may be willing to reduce your debt by 50% but you have accumulated all those late fees and your outstanding debt has grown so you need to evaluate if debt settlement is the best solution. Will the cost be more than the settlement amount, or are you so far behind that you can't make payments and get apply for loans. If you are delinquent by more than a couple of months, you may not have a choice.

If you don't settle after a few months of delinquency, your account may be turned over to a collection agency or you could be sued by the creditor. A judgment resulting from a lawsuit will appear on your credit report and could stay there as long as 10 years. Debt settlement will not appear on your credit report. However, if you are already delinquent on your payments, then your credit may already be impaired.

The advantage of debt settlement versus debt consolidation is that you will reduce your bills, instead of paying off your regular amount owed. With debt consolidation you just combine all your bills, rolling them into one, and paying one monthly installment.

The disadvantages of debt settlement are it could affect your credit score and the canceled portion of the debt is reported to the IRS as income. The IRS views the settled debt the same as receiving a cash gift or income. Check with a tax advisor. However you pay much less is taxes than you would in interest.

While debt settlement does get recorded on your credit report, it is usually considered less damaging to your credit than bankruptcy. The debt consolidation and debt settlement organizations might assist you in relieving you of but they cannot free you from debt completely.

Beware, some debt consolidation companies change names to avoid bad publicity and others are, or have been sued.

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