by Nancy Alderman |
If you have run up a mountain of debt and are finding it impossible to make the monthly payments out of your income even after trying out alternatives, then debt settlement could be a practical option. However, debt settlement can be a complex process, which if not done properly will have a substantial negative effect on your credit score. However, if you are unable to manage your finances, the process of rebuilding your credit may very well start with debt settlement. Doing debt settlement by yourself has a number of advantages but you need to take a considered look at whether it is a practical proposition.
Advantages of DIY Debt Settlement
Save a lot of money: When you go through a debt collection agency, you will usually end up paying 25-40% of your savings through settlement. For example, if the agency manages to save you $50,000, you could expect to pay as much as $20,000 in fees. However, given the complex nature of the settlement process, you may not be averse to paying such fees to a professional agency for the peace of mind it affords you.
Get an easier deal: When you approach creditors individually they give your submissions more credibility than when you do through a professional agency. In fact, they usually are very aggressive when dealing with settlement agencies because they know negotiating with them can take a long time because the payments are usually put on hold to create extra pressure on them. However, debt settlement is a difficult process and the best results are usually got by professionals who know exactly what pressure to apply to the creditors.
Motivation for better financial discipline: When you try and settle debts on your own, you will need to have extended interaction with your creditors who will point out your various mistakes that have led to this state of affairs. Settling debt effectively is generally such an arduous process that you will automatically be motivated not to get into a debt trap again. However, the process may well be too much of a strain for someone whose finances have been upset due to medical problems or a family tragedy.
How to Settle Your Debt Quickly and Effectively
Get advice from experts: Before you actually initiate the process of debt settlement with your creditors, make sure that you understand how to go about it and the consequences of the outcome. Not only does debt settlement have an impact on your credit score but also it could mean that the amount you save is treated as income by the Internal Revenue Service making you liable to pay tax in a situation where you don’t have any surplus. Make it a point to peruse the debt settlement reviews available in plentiful on the Internet.
Plan the settlement schedule: In sharp contrast to the usual policy adopted by professional agencies to make creditors wait till such time the situation becomes so painful that they become more amenable to settling, the best approach when you are doing it alone is to complete the settlement as fast as possible. The time frame will depend on how quickly you can save up enough money to pay off around 30-40% of your debt by making a lump sum payment. Fast debt settlement is an added incentive for the creditors to negotiate with you without the hassle of engaging in protracted and expensive litigation.
Find the money: A key component of effective debt settlement is the one-time lump sum payment that is the inducement to a creditor to settle. You need to look around and see how you can raise the cash; it could be some idle assets like a second car or even a coin collection that you can sell. Ask family and friends for loans, take a second job, or even refinance your mortgage to get enough money.
Explain your circumstances: The key to a successful debt settlement is being able to explain to your creditors the reasons of your financial hardship so that they are able to appreciate that you are not a willful defaulter. The extent of the evidence that you will need to present depends on the debt type but it pays to be well prepared. Professional agencies can take this on for you for better results.
The success of debt settlement depends substantially on how effectively you are able to present your case to the creditor and your bargaining skills. At the end of the day, if you reach a satisfactory settlement, then be sure to take it in writing so that you can enforce it later if the creditor continues to show dues against your name.
Nancy Alderman is a personal finance counselor who routinely advises a number of individual clients on the pros and cons of debt settlement. She recommends debt settlement reviews as essential reading for an appreciation of the subject.