Choosing the Best Debt Settlement Company

Debt settlement, often referred to as debt relief or debt resolution, is an agreement between a borrower and creditor where the borrower pays a lump sum that’s less than the total amount owed. In return, the creditor forgives the remaining debt. This approach is usually considered when a borrower is significantly behind on payments, and creditors are more inclined to accept a reduced amount rather than risk receiving nothing. Sometimes, creditors might agree to a series of payments to settle the debt.

While you can negotiate a settlement on your own, many people choose to hire a debt settlement company. These companies typically charge 15% to 25% of the debt balance for their services, and you only pay if they successfully negotiate a settlement that you approve. This professional help can be especially beneficial if you have multiple accounts or lack confidence in your negotiation skills.

Debt settlement is generally applicable to unsecured debts, such as personal loans, credit card balances, medical bills, collection accounts, and in some cases, private student loans. It doesn’t work for secured debts since the lender can simply reclaim the collateral if you default. It’s also important to note that creditors are not obligated to settle, and during the process, you may still face collection efforts, including phone calls, notices, and even potential lawsuits.

How Debt Settlement Works

When you enroll in a debt settlement program, here’s what you can typically expect:

1. 1. Building a Settlement Fund: You’ll need to gather a lump sum to offer your creditors. If you can’t access this amount from savings or a loan, you may stop making payments on your debts and instead funnel that money into a dedicated settlement savings account. On average, it can take four to six months to settle your first debt, and two to four years to complete the process if you have multiple debts.
   2. Dealing with Creditors: Once you stop making payments, expect to hear from creditors and debt collectors. They might increase their efforts to collect the debt, including potentially filing a lawsuit. Your debt settlement company can advise you on how to handle these interactions.
   3. Negotiating a Settlement: When you have saved enough, your debt settlement company will approach your creditors with an offer. If a settlement is reached, you decide whether to accept or decline it. By law, you only pay the debt settlement company if you agree to the settlement and make the payment.
   4. Closure and Reporting: Once settled, your account will likely be closed, and the creditor will report it as “settled for less than the amount owed” to credit bureaus. Any remaining balance on the account will be forgiven.

Who Should Consider Debt Settlement?

Debt settlement may be suitable if you:

• • Have an overwhelming amount of unsecured debt
  • Are looking to avoid bankruptcy or do not qualify for Chapter 7 bankruptcy
  • Can demonstrate a financial hardship that might prompt creditors to agree to a settlement

Creditors may settle for less if they believe they won’t recover the full amount or if taking legal action would be too costly. However, if your primary goal is to reduce your monthly payments, debt settlement might not be the right solution.

Pros and Cons of Debt Settlement

Pros:

• • You might pay less than what you owe.
  • Debt settlement is a private process, unlike bankruptcy, which is public.
  • You maintain control over whether to accept or reject a settlement offer.
  • Collection calls typically cease after a settlement is reached.

Cons:

• • Not all debts can be settled, and there’s no guarantee of success.
  • Accumulated late fees and penalties can diminish the value of settlements.
  • Forgiven debt may be taxable.
  • Debt settlement fees can be substantial.

Costs Associated with Debt Settlement

Debt settlement companies generally charge a percentage of either the total debt enrolled or the amount saved through the settlement. Fees typically range from 15% to 25% of the enrolled debt. For instance, if you enroll $10,000 of debt and settle for $5,000, expect to pay between $1,500 and $2,500 in fees. These fees are only charged when a settlement is reached. Additionally, you might incur fees for setting up and maintaining a savings account with the debt settlement company.

Choosing the Right Debt Settlement Company

When selecting a debt settlement company, consider these factors:

• • Eligibility: Ensure the company can handle the type and amount of debt you have.
  • Fees: Look for companies with the lowest fee percentages and consider any additional fees.
  • Accreditation: Check if the company is accredited by reputable organizations like the American Fair Credit Council or the International Association of Professional Debt Arbitrators.
  • Transparency: A good debt settlement company will be upfront about the potential impact on your credit score and the risks involved.
  • Customer Service: Review feedback from sources like the Better Business Bureau and the Consumer Financial Protection Bureau’s Consumer Complaint Database.

Alternatives to Debt Settlement

If debt settlement isn’t the right fit, you might consider:

• • Debt Management Plans (DMPs): These plans consolidate your debts into one monthly payment, managed by a credit counseling agency. The agency may negotiate lower interest rates and fees on your behalf.
  • Debt Consolidation Loans: These loans combine multiple debts into one, ideally with a lower interest rate or monthly payment.
  • Balance Transfer Credit Cards: These cards allow you to transfer debt from other credit cards, often with a 0% introductory APR for a set period.
  • Bankruptcy: Filing for bankruptcy can halt collection efforts, but it involves court proceedings and has long-term consequences.
  • Direct Negotiation: If you prefer not to work with a debt settlement company, you can negotiate directly with your creditors. Some experts argue that there’s nothing a debt settlement company can do that you can’t handle yourself.