When you have no money and a lot of debt, there seems to be no way out. You can’t pay your debts all at once – it is just too much for your current finances. So what options do you have? Debt settlement programs, sometimes called debt settlement plans, work with creditors to arrange lower monthly payments over time (which eventually become lower than the original debt). This means you can afford to make a payment, and eventually, your balances should become less than what is originally owed.
1. Time Management
When you are in debt, it is often hard to make payments on time. Debt settlement programs work by letting your credit card company know they will receive the money owed at a certain date – this means creditors will not charge interest on what you owe until after that date.
This gives you time to gather the funds necessary to pay back all of your debt. Not all companies offer this type of payment plan, so it is best to do some research. For example, you can find out about different debt relief companies on Chron, as well as explanations of how each of them works. Knowing these details ahead of time could help you save both money and time in the future.
When discussing payment deadlines with creditors, you can typically have up to 120 days after the agreed-upon date – many people say this is the time required to even get a response from most companies.
2. Lower Monthly Payments
Debt settlement is often not an option for people who owe huge amounts of money – but it is useful in consolidating smaller debts into manageable payments. Instead of paying each creditor on their own, you make one payment to the debt settlement program, which then distributes your money among creditors (your credit card companies).
You will still be making payments towards your debts, but these are typically much lower than the original amount. This type of payment arrangement also reduces the number of bills you need to manage each month, making it easier for you to budget and pay off debt quickly. In order to have a successful debt settlement program, you will need to pay the company a certain amount every month – usually between 3% and 5% of your outstanding balance.
Lower monthly payments can also help you maintain a good credit score. While your score will go down slightly during the settlement process, it should start to improve again once all of your debt has been resolved.
3. Flexibility
Debt settlement programs are flexible, in that they work with you to find what works best for your financial situation. First of all, your credit card company may decrease the monthly payment amount on its own during the settlement process.
This is because most creditors will allow debt relief companies to handle negotiations – after all, it saves them the trouble of dealing with multiple customers and trying to get in touch with each person individually. The creditors will typically also freeze the interest rate on your account until you settle, which means they won’t charge you more than what’s already been agreed upon.
You can usually work out a plan that pays off all of the debt in three years or less without having to pay any penalties or extra fees. This type of payment arrangement is affordable and reasonable for most people, which means that you will only need to pay a certain percentage of your total balance each month. However, you do have the option to pay more than what’s required if your financial situation allows it.
4. No Hidden Fees
Debt settlement programs should not charge any extra fees for their services. However, you may be required to pay a set-up fee upfront. If the company agrees to take over your debt, they will negotiate with your creditor on your behalf.
Since your credit card company will still want to get paid, it is in their best interest to accept a reasonable settlement plan. Otherwise, the creditor could face some bad publicity – which is why they are likely to work with you during your negotiations even if you use a debt relief program. For example, you may be able to reduce your outstanding balance to as little as 10% of what it originally was. This means that a $5,000 debt can be paid off for as little as $500.
One of the advantages of debt settlement programs is that you won’t have to keep track of any monthly payments. Because of this, most programs will allow you to request a refund of the set-up fee if they don’t manage to settle your debt after 120 days.
5. Tax Implications
Debt settlement may help you avoid “cancellation of debt income,” which is basically just another term for tax forgiveness. If you qualify and negotiate with your credit card company to forgive a certain percentage of what you owe, the forgiven amount will be considered taxable income.
Once you sign up for a debt settlement program, the company will let you know how much you can expect to pay in taxes. If you don’t qualify for tax forgiveness, they will also tell you what percentage of your debt has been settled.
In addition, your credit score may decrease slightly during the negotiation process – but this should return to normal once all of your debt has been resolved. Even a simple debt settlement could improve bad credit history and get you back on track to financial freedom.
6. Personalized Approach
Unlike bankruptcy and other debt solutions, a debt settlement program will work to find out your specific financial situation and what you can afford. This means that the company you hire should take the time to get to know you and offer personalized advice on how much you can pay each month.
An example of this is when you have multiple accounts with a creditor. In most cases, the account is closed once it has been settled and all of the debt on that credit card is forgiven. Then, your credit report is updated to show that this account was either “settled” or “charged off.” Debt settlement programs should also check your credit score regularly to help ensure that your credit rating won’t be damaged during the negotiation process.