Sometimes called “debt arbitration” or “debt negotiation,” debt settlement is an agreement made between a creditor and a consumer in which the total debt balance owed is reduced and/or fees are waived, and the reduced debt amount is paid in a lump sum instead of revolving monthly. Maybe you’ve seen the signs on the side of the road, or you’ve gotten solicitor calls or brochures in the mail that promise to “Settle your credit card debt” or “Eliminate debt now!” The offers are tempting but are they legitimate? Unfortunately, in some cases, the answer is no. Not only may these claims be dishonest, some are simply scams, trying to take advantage of desperate people. The term settlement comes from the idea that the creditor agrees to “settle” your account, and also generally includes the closing of the account. If you’re carrying a lot of debt or high credit card balances, you’ve probably seen the advertisements from debt settlement or credit card settlement companies that promise to help you settle debt for a tiny fraction of the amount of money you owe to creditors. But is debt settlement a good idea? And what are the benefits of debt settlement over other ways of resolving your financial difficulties? Debt settlement can help some people get out of debt at a cost that is less than what they owe. For others, debt settlement proves to be a costly mistake. How debt settlement worksYou stop making payments to your creditors for a period of time, often six months or more. Once your accounts are significantly overdue and your creditors are starting to get worried, you make a debt settlement offer of a small lump sum payment in exchange for erasing your debt. If your creditors believe this is the best they can get, they may be inclined to accept your offer. Alternately, they may choose to sue you or turn your case over to a collections agency. If your offer is accepted, you’ll have to pay your debt settlement agency as much as 25% of your savings, and the Internal Revenue Service (IRS) may take another 25%, leaving you with a much smaller windfall than you planned on. Is debt settlement a good idea for paying off debt fast?When you apply for debt settlement, it will take several months before you can make a settlement offer. If your debt settlement plan is successful, you may be able to erase your debt more quickly than by making regular payments over time, but it’s not an ultrafast fix. Is debt settlement a good idea compared to bankruptcy?Conventional wisdom is that bankruptcy should be a last resort for people in financial trouble. Filing for bankruptcy will likely mean you’ll have to give up some of your assets, and your credit rating may be damaged for up to 10 years. One positive note: bankruptcy can be a quick process, enabling you to start a new financial life and begin rebuilding your credit more quickly than other options. Is debt settlement a good idea instead of consolidation?Debt consolidation is a way of simplifying your finances and reducing the amount of interest you’re paying on loans and credit cards. It will not adversely affect your credit rating, but it likely won’t help you pay off your debt quickly. Is debt settlement a good idea compared to debt management?Debt management is another strategy for paying down debt that does not involve stopping payments to your creditors. Consequently, your credit will not be significantly impacted under a debt management program. Debt management is essentially a way of managing your financial life more carefully to allow you to pay down debt more quickly, while getting help from financial professionals to learn to live debt-free in the future. Is debt settlement ever a legitimate and viable option?Yes, but only in certain conditions, and it can cause potentially negative effects to your overall monetary situation and credit score. Each creditor’s policy on account settlement varies, and it is always a creditor’s right to dictate their own terms. Determining factors may include the total amount of debt owed, the length of time an account has been active, and the length of time the account has been delinquent, along with other criteria. Cons of Debt Settlements1. Debt Settlement Fees • Reduce balances on revolving accounts: The second most important factor in credit scores is your utilization rate the amount of credit you’re using relative to your overall credit limit. If you tend to carry high balances on your credit cards, reducing that debt load will improve your utilization rate. How Debt Settlement Affects Your Credit ScoreThe reason debt settlement is considered a negative mark on your credit report is because settled debts are those that you’ve paid off for less than what you owed. Which means you didn’t pay the debt in full or as agreed. In most cases, it’s better to settle a debt than to continue to miss payments, but it will still ding your score. If possible, it’s best to settle your debts before they are charged off. A charge-off is when a lender “writes off” a debt after 180 days of not receiving a minimum payment from you on the debt. However, you still owe the debt and it will still appear on your credit report. This is also the point where a lender might sell the debt to a third-party debt collector. When a lender writes off your debt, they close your account and list it as a charge off, which hurts your credit score. For many people, though, it can be tough to both negotiate and come up with the money to settle several debts within a six-month time frame. So you might want to settle one card and target one that you can take care of before a charge off happens. The debt settlement process will especially hurt your credit score if you’ve stopped paying your creditors to save up money to settle your debts. That’s often what a debt settlement company will ask you to do if they’re negotiating on your behalf. When you pay off an account, your creditor updates your account to reflect the new status (closed or paid in full, for example). Debt settlement is the same: After you settle a debt for less than what you owe, the account will be designated settled. If you have no history of late payments, aka “delinquencies,” the account will remain on your credit report for seven years from the date the account was settled. Or if you did fall behind on your payments, the account will stay on your credit report seven years from when it first became delinquent and was never current again. But you can start improving your credit score before those debts disappear from your report. And the older those debts get, the less they’ll hurt your score. How is my credit score calculated?When considering how debt settlement affects your credit score, first it’s helpful to understand the factors involved, and how each is weighed. The amount of time it takes for your credit to start improving will largely depends on your credit history. If those settled debts are somewhat of an anomaly for you you’ve successfully paid off several debts in the past that will help your credit rebound. That shows lenders you are capable of paying your debts on time. Having other debt you’re still paying and are current on, such as a mortgage, car loan or other credit accounts will help, too. People with a fairly robust and positive credit history might be able to start improving their credit score in six months or possibly as little as half that time. If your credit history is skimpier, it could take much longer. For example, if you don’t have a history of paying off debt and you aren’t currently making timely payments on a mortgage, a loan or other credit cards. And if the accounts you settled were ones you’ve had for a long time, it could hurt your score because the length of your credit history (including the age of your oldest account) makes up 15% of your credit score. If you have a poor and/or thin credit history, it could take 12 to 24 months from the time you settled your last debt for your credit score to recover. Either way, you’ll benefit from debt settlement if that means you’re no longer missing payments. It will also improve your debt-to-income (DTI) ratio, the amount of monthly debt payments you have compared to your monthly gross income, and your credit utilization, which is how much credit you have available versus how much you’re using. Lenders look at your DTI in the loan approval process and your credit utilization makes up 30% of your credit score. Bankruptcy Lawyer For Settling DebtWhen you need to settle your debts and file for bankruptcy, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
Ascent Law LLC
8833 S. Redwood Road, Suite C West Jordan, Utah 84088 United States Telephone: (801) 676-5506
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