The average credit card debt of US households is more than $ 15,000. Many of these families work hard to get a minimum monthly repayment. Some families use plastic to pay for their daily living expenses, such as groceries, transportation costs, and medical deductibles. While the economic situation has improved, more and more credit card users receive calls and letters from creditors stating that their payments are late.
If you are over-indebted and stressed, now is the time to break this destructive cycle and get the help you need from the debt reduction plan. In this article, you will learn the principles of debt settlement, one of the most popular debt relief forms.
What is Debt Settlement?
Debt settlement (also known as debt arbitration, debt negotiation, or credit settlement) is a debt relief method where a negotiator communicates with creditors on your behalf to reduce your debt to an agreed-upon amount. Only unsecured credit cards, medical bills, and personal loans can be negotiated. You cannot afford mortgages, rent, utility bills, cell phone and cable charges, insurance premiums, car loans, student loans, alimony, child support, taxes, or criminal fines.
After you sign up for the debt settlement, your negotiating team will open a trust account for you. You must deposit up to 50% of your unsecured debt into your account within 24-60 months. This money is used to pay off debts between you and your creditors. Since the general debt business is profitable, you also have to pay 15-25% of the business’s service charge. This compensation is based on the original amount of the unsecured debt or the negotiated amount, depending on the debt settlement.
Most debt arbitration companies use third-party escrow services to “hold” the money they will later use to “hold” the settlement they negotiate with you. The most common hosting company is Global Client Solutions. Generally, transfer money to your trust account via ACH on the same day each month. If your checking account is a bank with overdue loans or credit card balances with your bank, it is recommended that you use other banks for debt settlement procedures.
Before you join their plan, the debt arbitration company must tell you three things:
1. You must receive an “early estimate” in writing of all costs associated with the debt settlement at the reduced and agreed amount.
2. You must get an “estimated timetable” to reduce debt.
3. You must be advised that debt settlement will adversely affect your credit score.
Here are some examples that debt clearing companies can’t tell you:
“We can cancel 50-70% of your debt.”
“We can pay back your debt in dollars.”
“We can halve your debt.”
“Debt settlement will not affect your credit score.”
“Once you join the debt settlement process, the calls and letters from creditors will stop.”
“Debt settlement will not affect your taxable income.”
“Once you join the debt settlement process, you no longer need to communicate with creditors.”
When considering a debt settlement, you should first understand:
1. Debt settlement does not solve your careless spending and saving habits. The only way to achieve lasting financial freedom is to apply dynamic financial recovery laws in your daily life. These wise monetary principles will help you build a solid foundation for spending and saving habits. They are discussed in another article entitled “The Dynamics of Successful Financial Transformation.”
2. Debt settlement is not to be confused with account consolidation (another form of debt reduction). Bill consolidation (also known as interest arbitrage) combines your high-interest credit cards and loans into a low-interest loan that you can afford. In other words, you have to borrow one to pay off many other loans. Consolidating accounts will not reduce your outstanding balance to creditors. It only lowers your interest.
3. One of the main reasons people choose debt arbitration is not to file for bankruptcy protection. Here are five reasons for the overwhelming consequences of bankruptcy:
Bankruptcy will remain on your credit report for 10 years and will adversely affect your credit score.
Bankruptcy will accompany you throughout your life. For example, many loans, credit cards, and job applications ask if you’ve ever filed for bankruptcy protection.
Bankruptcy does not alter maintenance and child support obligations and criminal fines.
Except in minimal circumstances, bankruptcy cannot wipe out student loans.
Bankruptcy cannot prevent the “insured creditor” from reclaiming the property. According to Nolo.com, “The cancellation of bankruptcy can eliminate the debt, but not the lien. Therefore, if you have a secured debt (debt is a lien on your property by the creditor, and if you don’t pay, you can that Debts), bankruptcy can eliminate debt, but it does not prevent creditors from getting their property back. ”
4. If your unsecured debt is $ 10,000 or more, debt arbitration can save more time and money than consolidating accounts. This is because debt settlement reduces your unsecured debt by up to 50%, and you do not have to pay additional interest on the balance. This is not the case with account consolidation. Only interest rates have been lowered. As a result, the debt liquidation process’s repayment period may be shorter than the repayment period of the invoice consolidation plan.
5. There is no public register showing that you have paid off debts.
6. Through debt arbitration, the reduced balance will appear in your credit report as “Paid in Full” or “Settled and Paid.”
7. Debt settlement will adversely affect your credit score.
8. Never pressure debt settlement companies into joining their plans.
9. Do not hire companies that are not interested in your specific financial needs.
10. Before registering for the debt negotiation process, check your budget carefully, and make sure that you can pay the monthly repayment amount. Don’t be surprised if you have to eliminate some unnecessary expenses.
11. During the debt liquidation process, calls and letters from creditors may continue. Participation in the debt settlement process will not automatically stop “legal collection activities.”
12. Debt arbitration can be a gamble because some creditors refuse to negotiate. In this case, you are responsible for paying the outstanding balance following the creditor’s terms.
13. As mentioned above, only unsecured debts, such as credit cards and personal loans, can be negotiated as reduced amounts. You cannot pay off your mortgage, rent, utilities, cell phone, cable TV bills, insurance premiums, auto, student loans, maintenance, child support, taxes, or criminal fines.
14. You can have tax consequences. For example, if you owe $ 25,000 and pay $ 15,000, the $ 10,000 difference is considered taxable income. The creditor must send you the 1099-MISC “Debt Settlement” report.
15. The debt company cannot represent you in court unless it is also a law firm.
16. Debt arbitration cannot prevent your home from being seized or your car from being repossessed.
17. Despite receiving warnings from the Federal Trade Commission (FTC), some debt clearing houses still engage in unfair trading practices. The Federal Trade Commission recommends, “Before participating in the debt settlement process, do your homework. You are making an important decision that requires you to spend a lot of money to repay the debt. Please enter the company name and use it in the search engine. term “complaint.” Please read what others have said about the company you are considering, including whether they are using a state or federal regulator for their involvement in fraud or dishonest conduct.
When choosing a debt settlement company, the following factors should be considered:
1. How long has the company been in existence? How much consumer and corporate debt does the company manage each year? How many individuals, families, and businesses does the company provide consulting services each year?
2. Have you appointed an experienced financial advisor to ensure that your debt settlement plan runs smoothly from start to finish?
3. Is the debt arbitration company a member of the online business bureau and the local BBB? How do they rate the two agencies? What are your complaints about its services?
4. The company is an active member of TASC (Association of Settlement Companies). TASC requires all of its members to follow strict standards when doing business with consumers and companies.
5. Is the debt arbitration company a member of Dun & Bradstreet, a global authority on business intelligence?
This article will introduce you to debt settlement principles, one of the most popular forms of debt relief. While the debt arbitration process can help you reduce your debt, it doesn’t teach you how to live with your finances. The only way to achieve lasting financial freedom is to apply dynamic financial recovery laws in your daily life. These wise monetary principles will help you build a solid foundation for spending and saving habits. They are discussed in another article entitled “The Dynamics of Successful Financial Transformation.”