Got a considerable credit card debt? Do you feel like you can’t afford to pay everything you owe? Then settlement might help you to provide a faster exit that you need to start afresh.
In a debt settlement, the creditor agrees to accept less than the amount you owe him as a complete payment. Once done, collectors now can’t keep on hounding you for the payment.
Here are a few significant points to be noted in this regard.
- It can reduce your credit
- Settling requires at least two to four years
- Can be quite expensive
Even if you have a successful settlement, you may know that you owe tax for your settled debt after a couple of years.
How Does It Work?
It comes into a picture when you have missed several payments or made late payments. As a result, your credit score may have been shredded, and you feel hopeless that there won’t be enough to pay the debt.
Here, debt settlement companies come and negotiate with the creditors to reduce the original full amount which you owe them. This is mostly done for unsecured debts like credit cards, in-store credit lines, collections bills, payday loans, and unpaid medical debt. However, it’s not going to be an option for house loans or federal student loans.
Another advice would be opening a savings account and keeping a monthly fund there regularly. This will make the settlement company believe that you have enough funds for a lump-sum offer, and then it goes ahead with the negotiation.
Now, the company will review your budget to see how much money you’ll be able to set aside every month. This amount is often a lot less than the entire monthly payment you are making on your credit cards. Once enough funds are generated, the company will approach any creditors to put a settlement offer. Of course, the creditor might come back with a counteroffer, and in this case, your team will negotiate to reach a final amount for both parties to accept. After you have settled the debt, you may need to pay some fees for the debt you settled. This entire process is repeated with every creditor until you reach settlements on all the debts.
When Could a Settlement Be a Better Option?
If you have a substantial credit card debt to repay and your payments aren’t working, then settlement could be a better option. It’s particularly helpful for debts charged off, which happens after six to nine months of no payment.
Usually, the creditor freezes the account, marks it as a charge-off status, and reckons it as a loss for the company. This account goes to either an outside collection agency or an in-house collections department. In both cases, interest charges and late fees are being frozen according to the Federal law.
The most significant advantage of settlement is that it reduces the interest rate applied to every debt with no new interest charges being applied. It could be a possible solution if you can accept some credit damage.