How To Settle Debt Whats The Best Way[yoast-breadcrumb]
How To Settle Debt: The Best Ways
Settling debt can be a great way to resolve financial obligations that have become unmanageable. With the right approach, you may be able to settle your debts for a fraction of what you owe. Here are some of the best ways to go about settling your debt.
Determine If Debt Settlement Is Right For You
The first step is deciding if debt settlement is the right option. Here are some key things to consider:
- Your financial situation – Do you have enough income to afford basic necessities plus save up a lump sum to offer creditors? Debt settlement requires having cash available to pay settlements.
- Your credit – Debt settlement will likely damage your credit score in the short term. Missed payments while settling debts will be reported. Be prepared for this impact.
- Your debt types – Debt settlement works best for unsecured debts like credit cards, medical bills, and personal loans. Mortgages and auto loans are usually not eligible.
- Your ability to negotiate – Confidence and perseverance are musts for DIY debt settlement. If you don’t feel up to the task, consider hiring a professional.
If you decide debt settlement could work for you, first try negotiating directly with creditors yourself. This avoids fees charged by debt settlement companies.
Negotiate With Creditors On Your Own
Here are some tips for DIY debt settlement:
- Stop payments – Creditors are more willing to settle when they see you can’t pay. However, this leads to late fees and damage to your credit.
- Wait 3-6 months – Don’t initiate settlement talks right away. Let some delinquency build up so creditors are motivated to settle.
- Gather account info – Have details on the accounts you want to settle – balances, interest rates, payment history, etc.
- Start low – Offer 25-30% of the balance as a first offer. Be prepared to negotiate up towards 40-50% of the debt.
- Get it in writing – Before paying anything, get the settlement offer and terms in writing from the creditor.
- Pay lump sums – Creditors often want settlements paid in a single payment. Have the cash ready when negotiating.
- Follow up – After payment, follow up to ensure the creditor reports the reduced balance and closes the account.
With patience and perseverance, you may be able to settle your debts for pennies on the dollar doing it yourself.
When To Use A Debt Settlement Company
If you are unable to settle debts on your own, hiring a debt settlement company may be an option. Here are some things to know:
- Fees – Debt settlement companies charge 15-25% of the enrolled debt amount. This is taken from settlements paid.
- Payment accounts – You’ll make monthly payments to a dedicated account, not directly to creditors.
- Creditor negotiation – The company handles all communication and negotiation with your creditors.
- Duration – Completing a debt settlement program typically takes 2-3 years.
- Tax implications – Forgiven debt from settlements may be considered taxable income. Consult a tax pro.
- Scams – Research any company thoroughly first. Debt settlement scams are common.
If hiring a company, choose one with a long track record of satisfied clients and settlements obtained. Get fee structures and results in writing beforehand.
Other Options Beyond Debt Settlement
While debt settlement can be effective, it does come with drawbacks like damage to your credit. Here are some other potential options to discuss with a credit counselor:
- Credit counseling – Nonprofit credit counseling agencies can help you through services like debt management plans.
- Debt consolidation loans – Taking out a new loan to pay off debts can simplify payments into one monthly bill.
- Balance transfer cards – Transferring credit card balances to a new card with a 0% intro APR can reduce interest.
- Bankruptcy – Filing for bankruptcy provides protection from collections and can eliminate certain debts.
- Home equity loan – If you have equity available, a home equity loan or line of credit may provide funds to pay off debts.
Protect Yourself From Debt Relief Scams
With so many Americans in debt, predatory scams promising debt relief are on the rise. Here are some tips to avoid getting conned:
- Research companies thoroughly – Check reviews, complaints, and the company’s rating with the Better Business Bureau.
- Avoid upfront fees – Debt relief companies cannot collect fees until after services are rendered.
- Get promises in writing – Have fee structures, services provided, and results guaranteed documented.
- Consult an attorney – Have a lawyer review any contracts before signing.
- Trust your gut – If something feels off about a company, it probably is. Move on.
Settling your debts takes time, effort, and diligence. But with the right approach for your situation, you can find financial freedom from burdensome debts. Always explore all options to find the best path forward. And be wary of “easy fixes” – they often lead to more trouble.