Sometimes, regardless of what you do, getting a leg up on your debt is just proving too difficult to do. In times like those, it’s a good idea to ask for help. The good news is creditors are sometimes willing to call it even for less than you actually owe. The process is called debt settlement and here’s how it works.
What is Debt Settlement?
In exchange for a one-time payment in full of an agreed-upon amount, some creditors will agree to settle your account. In most cases, you’ll need to be prepared to pay the negotiated amount in full upon getting it approved. And yes, it is entirely possible to accomplish this on your own. Although, many people have found it easier and less time consuming to work with a professional debt settlement firm.
How Debt Settlement Works
Either you, or a representative of the company you hire will get in touch with your creditors and offer one-time payments in full—if they will agree to concessions. It’s important to note, this process only works with unsecured debt. Home loans and car loans are generally impervious to settlement. The home or the car against which they are written secures these loans. Lenders can force the sale of those items to recoup their investments. Student loan debt cannot be discharged in bankruptcy court, so those lenders aren’t inclined to negotiate either.
Generally speaking, one must be pretty far in arrears for a lender to consider a settlement offer, so trying to reach an agreement while you’re still current is a tough sell. On the other hand, creditors usually look at settlement as a better option than forcing a borrower into bankruptcy. They know they’ll get something with a settlement. But they could get nothing at all if a borrower files for bankruptcy protection.
Whether you try to accomplish it on your own, or work with a settlement company, you’ll need to have a pretty hefty pile of cash at the ready to fund your settlement agreements. Debt settlement companies open escrow-like accounts for their clients into which deposits are made until the balance is sufficient to fund a settlement agreement.
This usually means you’ll stop paying your creditors each month and deposit those monies into the settlement fund account instead. Meanwhile, your debt negotiator is busy trying to work out deals with the people you owe. When a potential arrangement is reached, you’ll be asked to approve it and the funds will be withdrawn from the account to complete the transaction.
You can learn more at Achieve about this process.
Given you’ll stop paying your creditors directly, you’re going to get collection calls and your credit score is going to take a pretty significant dip. However, you’re probably getting collections calls now and your credit score has most likely taken a hit too if settlement is a viable approach. You can start rebuilding your score once the settlement is complete.
Debt settlement companies do charge fees for their services. However, a legitimate one will not ask you for payment until they’ve settled an account on your behalf. By the way, the process is not guaranteed to work. Some creditors just won’t settle. A number of variables have to line up just right.
In some cases, the IRS has been known to consider forgiven debt taxable income. In other words, a debt settlement agreement might just increase your tax liability. You should talk with your tax person before agreeing to a settlement, just to be on the safe side.
This, in a nutshell, is what debt settlement is and how it works. It can be a viable approach to debt relief, but you do have to make sure you’ve looked at every option before considering it. How to Buy a House After Bankruptcy