Thinking about debt settlement and not sure whether you’re eligible? You’ve come to the right place.
According to Bloomberg.com, consumer debt hit a record high for 90% of Americans over the past year.
Chances are you’re among that 90%. If you’re wondering how to get your ever-growing debt under control, debt settlement could be an ideal way out as long as you’re the right fit.
Is debt settlement right for you?
It’s easy and free to find out.
Table of Contents
Will debt settlement work for you?
Debt settlement is a fast and simple way to get out of debt, but it is not a free pass for people who simply don’t want to pay their bills. If you don’t have the discipline to set up a strict repayment plan or don’t have the time (or desire) to negotiate on your own with creditors, debt settlement can be an excellent alternative.
However, there are some basic qualifications to enroll in a professional program:
Do you have at least $10,000 in unsecured debt (or more than $1,000 in payday loan debt)?
Most debt resolution companies require that you have a certain amount of debt in order to enroll in their programs. The debt can be on credit cards, medical bills, personal loans or even some student loans, but secured debts, like car loans or home loans, are not eligible.
Do you have accounts that are at least 90 days past due?
For debt settlement services to be able to negotiate effectively, your debts must be charged-off. This means your lender has basically given up on getting paid. It typically happens when accounts are between 90 days and six months past-due.
Are you facing a legitimate financial hardship?
Serious debt is usually caused by a specific incident, such as job loss, a medical crisis, a divorce, a natural disaster, a car accident, etc. These are typically not your fault, but they can destroy a household budget. Most creditors will sympathize.
Are you racking up late fees because you can’t make your monthly payments?
Late fees (and accruing interest) can add up quickly. If you’re intentionally skipping monthly payments because you can’t juggle all of your bills each month, debt settlement can be an effective way to get your budget back on track.
Are your debts primarily from credit cards?
Almost all types of unsecured debt can be negotiated, including payday loans, personal loans, lines of credit, signature loans, department store credit cards and other miscellaneous debts. Credit card companies, however, are most willing to negotiate, so if you have a lot of credit card debt, your potential to save money is higher.
Are you already being contacted by debt collection agencies?
If you’re getting calls from debt collectors, it’s likely that your debts have already been charged-off, and debt collectors are typically willing to negotiate settlements.
Can you afford a temporary hit to your credit score?
When you enroll in a debt resolution program, you will have to stop paying your bills until they’re sent to collections. This will cause your credit score to temporarily fall. Your credit score will recover once settlements have been paid, but if you need to maintain a solid score for rental applications, job searches or an auto loan, that should be a consideration.
READ MORE: How will debt settlement impact your credit score?
Are you afraid to add up the full amount of your total debt?
You may need professional advice if you’re afraid — or unwilling — to add up exactly how much debt you currently owe.
Are you committed to becoming debt-free?
Debt settlement programs are not easy. You must be committed to making monthly payments, even during tough times. You must be 100% committed in order to ensure success. However, if you’re willing to follow through, you will end up debt-free while repaying significantly less than the total amount you owe.
Can you afford the monthly payments?
Debt settlement programs require you to maintain a savings account, and you must be able to make regular deposits to build a balance. You should be able to budget about 1.5% of your debt per month. Money in that account is used to pay negotiated settlements, either as a single lump-sum payment or a payment plan.
Pro tip: If you owe $10,000 in unsecured debts, you should plan to set aside about $150 per month. Everyone faces setbacks, so if you have to save 1% one month and 3% the next month, that shouldn’t be a deterrent. But if you can’t average that 1.5%, you may have a problem successfully completing the program.
Do you have additional resources?
You don’t have to have large inheritances or cash in your life insurance policies, but if you have any sources of alternate funds, they will give you some budget flexibility during the duration of the settlement program.
If you feel you meet these requirements, please complete this brief questionnaire.
Which debts are eligible for debt settlement?
There are two types of debt:
- Unsecured: This includes credit card debt, personal loans, medical bills, timeshares, gas cards, etc. Most of these are eligible for debt settlement. However, some key exceptions include child support, alimony, back taxes, utility bills and Military Star Cards.
- Secured debt: These debts are secured with collateral. They include home mortgages, auto loans, and most student loans. Secured debts are ineligible because the creditor can seize the asset that secures the loan.
READ MORE: What are the differences between secured debt and unsecured debt?
Am I eligible for DIY debt negotiation?
DIY debt settlement may work for simple cases. Everyone is eligible to try contacting their creditors to negotiate their own settlements, and that’s free. You’ll need to be a skillful negotiator and patient because this process will take some time. This also works best for people who only need to settle one or two debts. Juggling multiple negotiations and settlement payments can be tricky (and requires a lot of time and discipline).
How much does debt settlement cost?
Debt settlement companies will customarily charge between 15% and 27% of the total debt settled, so you won’t have to pay any money upfront. Most legitimate companies will offer a free initial consultation so you can learn whether debt settlement is your best option.
READ MORE: Debt settlement fees
How debt resolution programs work
Debt settlement programs are designed for consumers experiencing financial hardship and owe more unsecured debt than they can handle. Consumers who benefit the most are stuck in a cycle of only making the monthly minimum payments or can’t afford to continue struggling to make the monthly minimum payments. Furthermore, getting denied for debt consolidation loans from multiple creditors could signify that you’re a strong candidate for debt settlement.
These programs are typically run by for-profit companies that ask you to set aside a specific monthly amount in an escrow account until you’ve accumulated enough savings to begin negotiations to reach a realistic settlement. Once the savings account reaches a certain percentage of the debt owed, the company negotiates with your creditors on your behalf to reach a settlement agreement that resolves your debt. Until then, the funds you set aside belong to you, so the money is completely refundable. The agreed-upon payment will be lower than the total amount you owe and will be paid from your escrow account.
READ MORE: When is debt settlement a good idea?
Pro tip: Beware of any company that charges upfront fees. Only work with companies that charge performance-based fees.
READ MORE: Debt settlement companies
DebtHammer’s qualifications
In the initial consultation, the company will review its specific qualification criteria. Though it can vary from company to company, DebtHammer’s qualifications typically include:
- Account type: Enrolled debts must be unsecured
- Debt amount: The minimum total client debt amount is $7,500, and the minimum individual account balance is $500
- Hardship: You must be facing a genuine financial hardship
- Program term: You must have the ability to complete the program in 48 months or less, though there are some exceptions
- Program payment: You must be able to make the minimum program payments
- Budget requirements: Your total disposable income after monthly expenses must be at least $250 after program payments
- Jurisdiction: You must live in a state where DebtHammer is licensed to do business
READ MORE: How DebtHammer works
Financial hardship and debt relief
What is considered a financial hardship?
According to www.law.cornell.edu, financial hardship is the inability to meet basic living expenses for goods and services necessary for the survival of the debtor, spouse, and dependents. Examples of hardships could include job loss, loss of a caregiver, permanent disability, or devasting medical bills.
In debt settlement, hardship could mean two things:
- You could afford the loan when it was obtained, but you can no longer afford the payments
- You could not afford the loan when it was originally obtained
When a borrower cannot make monthly payments, debt settlement can be a viable option to get their finances back under control.
The ability to offer evidence of hardship will help with negotiations if you choose to go it alone. DIY debt settlement involves calling your creditors and offering a settlement on your own. This can be a low-cost way of getting out of debt, but hiring a debt settlement company can be a more straightforward option, particularly if you aren’t a good negotiator.
Two of the most significant advantages of professional debt settlement are:
- They will have the ability to assess your level of hardship and have an idea of whether a settlement is a viable option
- Many debt settlement companies have pre-negotiated rates with creditors and will be aware of which creditors are willing to settle
READ MORE: Debt settlement — how to get your debt under control now
Pro tip: Not all creditors are willing to work with debt settlement companies, and creditors are not legally obligated to accept debt settlement offers. If a debt settlement company tells you differently, find a new company.
READ MORE: Need help now? Here’s how to get free money and other assistance
What are debt settlement’s biggest drawbacks?
Repayment is usually the biggest sticking point. You must have enough income to make the deposits over a consistent period of time to settle your debts. This doesn’t just mean the total amount of unsecured debt you have. It also means that you can repay through a debt settlement program in 48 months or less. It’s possible that you may meet the minimum debt requirement but still not qualify because you don’t have a steady income.
READ MORE: Debt settlement pros and cons
Pro tip: If you aren’t sure whether you meet the qualifications, it won’t hurt to set up a consultation. Debt settlement companies will evaluate these criteria to qualify you for their programs. Though debt settlement may seem expensive, you will save money in the long run by only paying a fraction of your debt, and it could very well be a more affordable option than bankruptcy.
READ MORE: Do you need a debt settlement attorney?
Scams are another big drawback
Some debt relief companies attempt to exploit struggling customers. Investigate any company you’re considering and check customer reviews. Check the Better Business Bureau and follow the safeguards recommended by the Consumer Financial Protection Bureau.
The most obvious sign of a debt relief scam is if the person or company wants you to pay an upfront fee. The debt settlement industry is heavily regulated, and upfront fees are not allowed. If a company tries to get you to make an upfront payment, cease all contact and file a complaint with the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC) and your state attorney general’s office.
There may be tax implications
Settling debt may have a few tax consequences. Forgiven debts over $600 could be counted as income on your taxes, so it’s possible that your creditors will send you 1099 forms.
If a lender forgives some or all of your debt, that forgiven amount may be considered taxable income. For example, if you owed $10,000 on a credit card and the lender agreed to accept $5,000 as a settlement, the forgiven $5,000 may be considered taxable income. However, there are some exceptions to this rule, particularly if the settlement was due to financial hardship.
Think you qualify? Here are the next steps
If you believe that you meet the qualifications for debt settlement, the next step is to decide if you want to handle it yourself or use a debt settlement company.
Click here to contact us directly to learn more about debt settlement and whether you are a good fit.
Other debt relief services
If debt settlement does not seem to fit your financial needs, there are other options available:
- Debt consolidation: Debt consolidation rolls all outstanding debts into one monthly payment, usually with a lower interest rate. You take on a new, larger loan and use that money to pay off other existing loans with higher interest rates. It also streamlines multiple credit cards into one payment, making it harder to miss a monthly payment or incur a late fee. Debt consolidation could be a good option for borrowers with many debts with high or variable annual percentage rates. If you can secure a low fixed rate, this new loan can save you a lot of money over the life of the loan. Many lenders offer debt consolidation loans for borrowers with fair to poor credit.
- Credit Counseling/DMP: Consumer credit counselors will review your financial situation and can customize a Debt Management Plan to get creditors off your back. Credit counseling agencies advocate on your behalf with creditors to resolve debt beyond a debtor’s ability to pay. Some nonprofit agencies charge minimal fees for debt management plans, while others can be for-profit, and the cost is higher. Typically, a debt management plan will cost anywhere from $25 to $55 per month.
READ MORE: Debt relief programs
- Chapter 7 bankruptcy: Bankruptcy may be the best option for some for a total financial reset and is one of the most powerful debt relief options available in the United States. It has helped many people escape poverty and get a clean financial slate. It gives you a fresh start by erasing your debts. Bankruptcy is best for those who can’t afford debt settlement. Those who don’t qualify for debt settlement because they don’t meet the $10,000 minimum will most likely have better options. Always check with an attorney if you’re seriously considering bankruptcy.
READ MORE: Debt relief of bankruptcy — which is best for you?
The bottom line
Not everyone is eligible for debt settlement, but if you are, it could be your best option for solving your financial problems. However, it is important to remember that even if you don’t meet the eligibility requirements for debt settlement, you still have other debt-relief options, including debt consolidation or nonprofit credit counseling.
