What Is Debt Settlement and When Is It My Best Option?
What is Debt Settlement?
Debt settlement is when a person in debt (or more often, a company on their behalf) negotiates with their creditors to resolve their debt for a smaller amount than what is owed. Typically, these debts are paid out in a lump sum. While someone can try to settle his/her own debts, companies that have experience working with certain creditors will often get a lower rate negotiated in a shorter period of time.
For example, if a consumer is trying to settle a $12,000 balance on a Discover credit card, a debt settlement agency may be able to persuade Discover to accept $8,000 all at once. The benefit to credit card companies is that they at least get a portion of what is owed, instead of having the client declare bankruptcy and never pay back the debts.
To make the lump sum payments, people will often put aside a portion of their financial savings every month. The FTC states that, “Debt settlement companies usually ask that you transfer this amount every month into an escrow-like account to accumulate enough savings to pay off a settlement that is reached eventually.”
While it can help with excessive debt, debt settlement can have long-lasting effects. It is an option frequently used for people feeling overwhelmed with debt, and who have maxed out their credit cards.
How Long Does It Take to Get out of Debt?
The average American typically has around $15,000 in credit card debt (usually with a 17% interest rate).
Most debt settlement programs times truly vary by program. Taking a look at 2 top companies in the industry, Pacific Debt Relief’s debt settlement program takes customers around 3 years to resolve the debt. Freedom Debt Inc’s program typically takes anywhere from 24-48 months.
How Is Your Credit Score Affected?
Debt settlement does impact credit scores. Those trying to settle their credit scores should know that a debt settlement will stay on, and negatively affect their credit score for 7 years. If someone tries to settle his/her own debts on their own, it does not hurt their credit score as much.
People who cannot make minimum payments on their credit cards or are already delinquent on payments would benefits from a debt settlement program. It doesn’t have as much of an impact as bankruptcy has, and should be used as an alternative if possible. However, for those who can make minimum payments, and just need help lowering interest rates, consolidation may be a better option.
Settlement Program Recommendations
Pacific Debt Inc was started in 2002, is well-accredited, and is A+ rated with the BBB. BestDebtCompanys explains that customers can enjoy the lowest rates in the industry; In fact, they only charge 17%-20% of the total enrolled debt. Customers actually report being able to reduce their owed balances by 70%. An average of 3 years to resolve debt can be expected. The company does have a high minimum debt requirement of $7,500, and is not available in all states. However, with a money back guarantee, and positive reviews across the board, Pacific Debt Inc is a solid option worth exploring for unsecured debt.
Freedom Debt Relief
According to BestDebtCompanys, Freedom Debt Relief was also started in 2002, and requires a minimum debt requirement of $7,500. The company is well-accredited, and offers great customer service. Customers can expect to pay 15%-25% fees of the total enrolled debt, and resolve their debt within 24-48 months. The company does not offer debt settlement to all states, but for eligible states, it is an option worth exploring for unsecured debt
When Is It Best to Settle?
Debt settlement can, and most often does, have negative effects on one’s credit score. Though many debt settlement programs claim to help negotiate with one’s creditors, this option is not for everyone. Debt settlement should only be used when one cannot make their minimum monthly debt payment, and does not want to declare bankruptcy. For people set on going this route, it is essential to choose a transparent and reputable company for the process.