Debt Settlement – When is it the Right Choice?
There are circumstances where pursuing debt settlement may be preferable to filing for bankruptcy or some alternative form of debt resolution. Debt settlement is when both parties, the creditor and the debtor, agree to payment terms or resolve a debt for a reduced amount. As with any settlement agreement, it is recommended you get the agreement in writing and that you include terms that the debt is considered “paid in full” after the settlement payments have been made.
How Do I Know if Debt Settlement is Right for Me?
Since every person’s circumstances are unique, there is no cookie cutter answer to this question. But there are some general guidelines that we use to determine if debt settlement is the most appropriate solution. Some of those guidelines are:
- Is the total outstanding debt owed is under $10,000?
- Do you owe money to less than 10 total creditors?
- Is your income is too high to qualify for debt elimination under a Chapter 7 bankruptcy?
- What are your short and long term financial goals (i.e. future home purchase)?
- Do you have cash savings available to make a settlement payment to the creditor with a lump sum?
We offer free consultations to discuss all of your debt resolution options. At the appointment we will carefully review your finances, analyze your circumstances and provide detailed recommendations for optimal debt resolution. Call us today at 866-261-8282.
What Factors Affect My Chances of a Successful Debt Settlement?
Many factors affect the ultimate success of negotiating a debt settlement with a creditor. Some of the factors that will determine your chances of success are:
- Your income and ability to make payments under a debt repayment plan and the resources you may have to make a lump sum payment under a debt settlement plan.
- Source of income (full-time, part-time, contract, self-employed, retired, etc). If you are entering a debt repayment plan, will you have the income (long term) to complete the payments?
- The age of the debt and length of time since you last paid on the debt. You may be able to negotiate better terms on older debt versus more recent debt.
- The total amount of the debt
- Spending patterns with creditors (i.e. credit card) over the past 3 – 6 months.
- Who is currently trying to collect on the debt and who owns it:
- Original creditor
- Has the creditor referred the matter to a collection agency
- Junk Debt Buyers (has some third party purchased the debt at a discount from the original amount owed?)
Since there are so many variables, we will be able to better advise you on your potential for success after we meet for the initial free consultation. The purpose of this meeting is for our firm to look at the big picture of your finances and give you options before you make any decisions.
Debt Settlement Techniques
Most often, debt settlement involves offering a creditor a lump sum payment in exchange for legal forgiveness of the balance of the debt owed. Typical settlements range from 40% – 60% reduction in debt (sometimes paying even less).
How will Debt Settlement Affect my Credit?
While the concept of reducing your debts is a positive step for your credit, you need to be sure that you are taking the legal steps necessary to protect yourself and your credit. Here are some considerations:
- Don’t fall behind on other bills (i.e. secured debts such as house payments or vehicle payments) to raise the money for a lump sum payment. This will only further compromise your budget and create future headaches, such as a home foreclosure or vehicle repossession.
- Be aware that if you stop making payments on a debt, it will reduce your credit score. This may be a short term strategic choice, but it is important to consult with a professional to understand how this decision fits in to your long terms financial goals.
- Be sure that the agreement legally releases you from the balance of the debt. It is important to have a seasoned attorney reviewing the legal agreement to be sure that your creditor doesn’t reserve the right to sell the balance of the debt to a 3rd party debt collection agency.
- For debt settlement, it is important to negotiate how the settlement is reported on your credit report:
- Is it written off?
- Indicated as “Paid as Agreed”?
Our job is to ensure that the settlement helps your credit versus creating a further blemish.
Debt Resolution Experts
In short, it is important to work with a licensed professional to:
- Determine if debt settlement is the right choice for your circumstances.
- Approach debt settlement to ensure an optimal outcome with improved credit standing.
- Explore alternatives to resolve debts.
We offer free consultations to review debt settlements and other debt resolution options. We understand the stress associated with unresolved debt issues and a budget that feels out of control. Our primary goal is to relieve that stress and develop an optimal plan to reach your long term financial and credit score goals. Call us today at 866-261-8282 to speak to one of licensed attorneys.