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.
Will debt settlement work for you?
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 be a sign 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.
Beware of any company that charges upfront fees. Only work with companies that charge performance-based fees.
In the initial consultation, the company will review its specific qualification criteria. Though it can vary from company to company, the qualifications typically include:
- Account type: 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 have 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 left over after program payments
- Jurisdiction: You must live in a state where the debt settlement company is licensed to do business
If you feel you meet these requirements, please complete this brief questionnaire.
Otherwise, if you don’t meet these requirements, you’ll likely have to try DIY debt negotiation or a different debt relief program.
READ MORE: 5 easy steps to pay off credit card debt over $10,000
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 simpler option, particularly if you aren’t a good negotiator.
Two of the biggest 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
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
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, there are some key exceptions, including 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 simply seize the asset that secures the loan.
READ MORE: What are the differences between secured debt and unsecured debt?
Debt settlement’s biggest drawback
Repayment is usually the biggest sticking point. Do you have enough income to make the deposits over a consistent period of time to settle your debts? You have to keep in mind that this doesn’t just mean the total amount of unsecured debt you have. It also means that you have the ability to 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.
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?
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.
You can contact us directly by clicking here to learn more about debt settlement and whether you are a good fit.
DIY debt settlement for simple cases may work. You can call the creditors on your own to negotiate a deal, and that’s free. You’ll need to be a skillful negotiator and patient because this process will take some time.
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 pros and cons
Check out this video to hear financial guru Dave Ramsey offer advice on debt settlement.
Other options if you don’t qualify
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: 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.
- Bankruptcy: Chapter 7, Chapter 11, or Chapter 13 bankruptcies 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 simply 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 will be eligible for debt settlement, but if you’re eligible, it could be your best option to solve your financial problems. However, it is important 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.
Debt settlement companies are typically for-profit and ask you to stop making payments to your creditors while they negotiate to lower the total outstanding balance you owe. The company will charge you 15%-25% of the amount settled. Typically, you will owe 50%-80% of the balance. While you stop making payments, you will begin to receive collection calls, and the late payments will be reported to the three major credit bureaus and will remain on your credit report for seven years. Your credit will be damaged and could also have some tax implications with the IRS because the forgiven debt is reported as income. Learn more.
Most debt settlement companies require applicants to have at least $7,500 to $10,000 of unsecured debt. Some companies specialize in payday loan debt and work with consumers who have as little as $1,000 in debt.
Paid in full is a better option than paid as settled. Paid as settled is when your debt settlement program is complete, and creditors will mark your debt on your credit report as “paid as settled.” Paid as settled indicates that you repaid less than you borrowed. It will push down your credit score because you didn’t fulfill the terms of your borrowing contract. Paid in full means you’ve paid your account as agreed. Paid in full will not hurt your credit score as much as a “paid as settled” notation, though your score might go down slightly because the paid debt will affect your debt-to-income ratio.
Unfortunately, scams are prevalent throughout the debt settlement industry. First, check to verify that a company is licensed through your state. Next, check customer reviews and the Better Business Bureau page. Ask about costs, review your finances, inquire how long it will take to complete the debt settlement process, know all the fees involved and how much money you will be paying over time, and understand the tax implications.
The most obvious sign of a debt relief scam is if the person/company offers to help get rid of your debt, but first, you must pay them a fee. If you receive a robocall from the company saying they can wipe out most of your debt and will try to get all your personal information during the initial call.
If you think a company is trying to scam you, please report it to the Federal Trade Commission (FTC), Consumer Financial Protection Bureau (CFPB.gov), or your state’s attorney general’s office.