Debt settlement is a negotiation entered into by a debt-ridden consumer with his/her lender. Commonly, lenders will agree to forgive at least a portion of the debt: maybe half, although deals can still vary greatly. Once settlements are reached, the final terms are laid in writing. The initial sum of money paid to the creditor is considered a fee for services rendered. Settlements are also recorded as a debt and can stay on your credit report for up to ten years.
This is the type of deal most people are familiar with: you hire a company to negotiate with your creditors on your behalf. The company will pay them a lump sum that is more or less equivalent to the total amount you owe. In most cases, you will have to pay this sum in about two to four years. Most companies charge an up front lump sum payment, but some do allow a percentage of your debt to be waived or forgiven (this is referred to as a “creditor mitigation”).
A debt settlement can help you avoid late fees, prevent over-limit fees and cancel credit card debt. If you negotiate with your creditor, you may be able to eliminate any penalty charges and accumulate only the amount you originally owe. With the elimination of penalties, your payments will typically become affordable. Additionally, you will be required to make monthly payments towards your remaining balance – a positive sign that your accounts are reaching the end of their terms. As your balances decrease, your credit scores could take a significant hit, however.
Settling debts with your creditors can have negative effects on your credit scores – however. Lenders do not take kindly to individuals who continually fail to meet their financial obligations. If you have a history of late payments, a high ratio of missed payments and a history of filing bankruptcy, these lenders may believe you are a risk and be more reluctant to work with you on a debt settlement plan. As mentioned earlier, there are pros and cons associated with each option. It’s important to weigh your options so you can decide if a debt settlement company is right for you.
One of the primary pros associated with a debt settlement program is that it does not require you to leave your home or other property. In order to settle your accounts, you will generally need to provide proof of income. The loan is paid off from your creditors in lump sum amounts. Typically, this is accomplished by paying off the accounts in full over five to ten years, depending on the type of agreement you enter into. The loan is usually made using an installment arrangement.
Another pro is that you can often reduce your monthly payments by 50% or more. This allows you to get out of debt quicker. There are some drawbacks to debt settlement as well. One of these is that you will likely have to deal with the collection of payments from your creditors. The good news is that most debt settlement companies may offer you a payment plan to help alleviate the responsibility of creditors.
One of the most important and most significant con is that you could become a victim of identity theft. This is often a problem because of the ease with which criminals can obtain information pertaining to you and your accounts. If you have your social security number, credit card numbers, bank account information or other private information, you could become a victim of identity theft. As a result of this, it is important to use caution when providing personal information online or when sharing this information with anyone else.
One of the most important things you can do to avoid becoming a victim of identity theft is to make sure that you do not make any large purchases until you know you can afford them. You should also check any mail you receive for fraudulent offers to finance your new purchase. In addition, you should not provide your personal information to anyone you do not know requesting money to help you pay off your debts. Remember that debt settlement companies are legitimate financial products to use, but you need to make sure that you are making the right decisions in regards to your financial health and the security of your financial information.