Can you actually reduce the amount of money you owe your creditors? With debt settlement that is possible.
Why would a creditor accept a payment less than the full amount you owe? Great question. The simple answer is that some money is better than none. The willingness to negotiate the amount you repay is particularly common with credit card companies who anticipate that many people who use their credit cards will not be able to repay the amount due.
So what do they do? They build that fact into their business models and that is one reason why credit card interest rates are typically between 15-19% which is high for a loan as compared to loans such as home mortgages (4-6% these days).
The process of negotiating your repayment amount with credit card companies is called debt settlement or debt negotiation. Although the process is relatively straightforward the credit card companies don’t make it as simple as calling them and asking for debt forgiveness. In fact, if you try that you are likely to spin your wheel in frustration in a circle of bank bureaucracy.
This is why people hire debt settlement companies to assist them with the settlement process. What exactly is that process?
Let’s boil it down into steps:
- A debt settlement company reviews your financial situation in depth?
- If you qualify they will let you know how they may be able to help and place you on a monthly consolidated debt payment program.
- You will pay the settlement company that amount every month and not your creditors
- The settlement company will keep that money in a safe 3rd party escrow account that you control.
- Once enough money has built up into that account, the settlement company will begin to approach your creditors with their negotiation process.
- If your creditors agree to a lower repayment balance, the settlement company will use the funds in the escrow account to pay off each creditor one by one using lump sum amounts.
- Once the final creditor is repaid, you are debt free
A few critical factors you need to be aware of with debt settlement is that:
- As you build up the funds in your escrow account to be used for repayment your creditors are not getting paid so you will fall behind and thus your credit score will take a big negative hit during the process
- Because your creditors are not being paid anything until a settlement is agreed to by both sides, they will likely continue to call you frequently demanding payment but a good settlement company will be able to guide you through this
- By law, debt settlement companies can only be paid the vast majority of their fees based solely on the amount they save you. This is great as it incentivizes them to save you as much as possible.
- There may be a tax implication to a successful settlement because as crazy as it sounds, the IRS may rule your negotiated savings as “income” and therefore be taxable. This is something you should discuss with a tax advisor.
In summary, debt settlement is great for the person who wants to avoid bankruptcy and is in the unfortunate position of not seeing how their income can ever repay the amount of credit card debt they’ve accumulated. If this sounds like you, find a reputable debt settlement company and speak with them to learn more so you can decide what’s best for you.