As
frustrating as it is to be in debt, planning your way out can also be an uncertain experience. By now you know that just making minimum monthly payments hardly makes a
dent in the total that you owe. But, weeding through the various alternative methods of debt relief currently available to consumers can feel like an overwhelming task.
Of course, any truly worthwhile strategy for eliminating debt should also include a component for establishing savings and building future wealth--that's not an extra, that's an essential!
The following article describes the debt settlement process. Coupled with financial coaching, debt settlement is a highly effective means of resolving burdensome personal debt.
Of course, any truly worthwhile strategy for eliminating debt should also include a component for establishing savings and building future wealth--that's not an extra, that's an essential!
The following article describes the debt settlement process. Coupled with financial coaching, debt settlement is a highly effective means of resolving burdensome personal debt.
What is Debt Settlement?
A debt
settlement program negotiates on your behalf to actually reduce the total amount you pay to your creditors, saving you thousands of dollars and shaving years off your payments.
Since your debt balance will be lower and more manageable, you have the opportunity to pay off your debts faster and, thus, incur less in interest charges. With a debt settlement
program, it may be possible to become debt-free within three years.
What can I expect to be the outcome of my participation in the debt settlement process?
You can expect to have your debt settled for an amount that is substantially lower than the current balance on your credit card statement. You can figure on achieving a settlement somewhere between 30-70% of your current credit card balance--indeed, 50% is pretty typical.
The exact terms of any settlement will depend upon several factors and, therefore, cannot be guaranteed ahead of time. But,figuring in the fees that you will pay your debt settlement company for negotiating your debt on your behalf, your savings will still be substantial compared to what you would have paid to your creditor on your own. That's because your debt will be paid off faster through the debt settlement process and you will not only save principal, as described above, but also the interest you would have paid to your creditor during the lengthier period it might have taken you to pay off the full amount of your debt on your own.
Why wouldn't everyone with credit card debt get involved in debt settlement? What are the negatives to this strategy?
The debt settlement process exists for consumers who, because of hardship circumstances, are unable to realistically pay the total amount owed on their credit cards. Consumers involved in
debt settlement may be facing imminent personal bankruptcy or they may be faced with the painful choice between making good on debts to their creditors and meeting other essential monthly
obligations, like putting food on their tables or keeping the heat on in the cold.
Being unable to pay is an awfully painful and frustrating predicament for anyone to be in, but, one which, these day, creditors have come to recognize is not so uncommon.
Because it is initially credit negative, the debt settlement process may not be for consumers who are highly sensitive about their immediate credit standing. However, credit standing will recover as debts are settled and worries about initial damage to credit need to be considered in relation to the painful alternatives a consumer may be facing (i.e., personal bankruptcy, ongoing delinquencies in payments to creditors). Participants in debt settlement are also likely to face an initial period of phone call reminders from their creditors which, while manageable, may be stressful and inconvenient. Your FreshStart Coach will help you handle these creditor calls until they cease.
Being unable to pay is an awfully painful and frustrating predicament for anyone to be in, but, one which, these day, creditors have come to recognize is not so uncommon.
Because it is initially credit negative, the debt settlement process may not be for consumers who are highly sensitive about their immediate credit standing. However, credit standing will recover as debts are settled and worries about initial damage to credit need to be considered in relation to the painful alternatives a consumer may be facing (i.e., personal bankruptcy, ongoing delinquencies in payments to creditors). Participants in debt settlement are also likely to face an initial period of phone call reminders from their creditors which, while manageable, may be stressful and inconvenient. Your FreshStart Coach will help you handle these creditor calls until they cease.
Will the Debt Settlement Program affect my credit?
Yes. Your
credit cards will not be paid on a monthly basis until a settlement with your creditors has been reached. During the time your debt settlement company is negotiating the balance on your
cards, your accounts will be regarded by your creditors as delinquent.
Once your account is settled, the creditors report to the bureaus that your account was settled and that there is now a zero balance remaining with them. Involvement in the debt
settlement process should, ultimately, improve your credit worthiness by reducing your debt-to-income ratio (i.e., the amount of outstanding debt you are carrying in relation to your
income).
Will all creditors negotiate with a debt settlement company?
Most.
Remember, the debt settlement process exists for consumers in real financial distress--Simply speaking, that's what makes the debt settlement process work, in the first place.
You see, creditors know that many consumers struggling with their finances and possibly even facing personal bankruptcy will not be able to make regular monthly payments toward their debts. Creditors also know that these distressed consumers may be forced to halt payments on their debts altogether. Acknowledging the risk of receiving no further payments from a consumer at all, creditors "soften" and become willing to settle the outstanding balance of a consumer's debt with a reputable debt settlement company for a negotiated, compromise amount.
You see, creditors know that many consumers struggling with their finances and possibly even facing personal bankruptcy will not be able to make regular monthly payments toward their debts. Creditors also know that these distressed consumers may be forced to halt payments on their debts altogether. Acknowledging the risk of receiving no further payments from a consumer at all, creditors "soften" and become willing to settle the outstanding balance of a consumer's debt with a reputable debt settlement company for a negotiated, compromise amount.
Couldn't I negotiate my debts on my own?
Possibly,
but keep in mind that successful negotiation, of any sort, always comes down to "leverage"--the force or power behind your suggested settlement. Leverage tips the scales of compromise in
your favor.
For example, as a consumer negotiating the purchase of a widely available new car, your "leverage" rests in your ability to leave one automobile showroom and go across the street to
another. In this example, you've got the power to choose another dealer. When it comes to negotiating credit card debt on your own, your creditors usually hold leverage over you,
the individual consumer...if you don't pay up, your creditors may intensify the pressure on you with phone calls and letters, collection agency referrals, etc..
Working with a debt settlement company can tip the scales back toward your favor. This is because the debt settlement company that represents you in negotiating with your creditors doesn't just represent you, your debt settlement company represents thousands of people like you who, because of hardship, will only be able to make a reduced payment on the balance of their outstanding credit card debt. Creditors know that if they fail to negotiate in a fair and open minded way with a debt settlement company with which they do a great deal of business every year, they may lose the opportunity to settle with thousands of consumers and thus, lose significant income in debts that may never be collected. This leverage is what gets your creditors to stop and take notice when you are represented by a debt settlement company and this is the leverage that enables your debt settlement company to negotiate a more advantageous settlement on your behalf than you might otherwise receive if you were to try and settle your case on your own.
Thus, it is very important to work with a debt settlement company that handles significant numbers of cases each year and one which has a good track record negotiating quality settlements that help consumers.
Working with a debt settlement company can tip the scales back toward your favor. This is because the debt settlement company that represents you in negotiating with your creditors doesn't just represent you, your debt settlement company represents thousands of people like you who, because of hardship, will only be able to make a reduced payment on the balance of their outstanding credit card debt. Creditors know that if they fail to negotiate in a fair and open minded way with a debt settlement company with which they do a great deal of business every year, they may lose the opportunity to settle with thousands of consumers and thus, lose significant income in debts that may never be collected. This leverage is what gets your creditors to stop and take notice when you are represented by a debt settlement company and this is the leverage that enables your debt settlement company to negotiate a more advantageous settlement on your behalf than you might otherwise receive if you were to try and settle your case on your own.
Thus, it is very important to work with a debt settlement company that handles significant numbers of cases each year and one which has a good track record negotiating quality settlements that help consumers.
If my debt has gone to "collection", can I still participate in debt settlement?
Absolutely.
The fact that your debt has been sent to a collection agency may actually be a good thing in the debt settlement process--that's because an advantageous settlement is even more likely to
be obtained from a company that is still able to "make a profit" on your partial payment of a debt.
You see, usually collection agencies have "purchased", from the large creditor banks, the right to collect an individual consumer's debt for pennies on the dollar. Collection agencies purchase large lists of client debts, hoping to collect on as many of these debts as possible. The collection agency might have paid 30 cents for the right to collect each dollar owed by a consumer. If the collection agency doesn't collect anything at all, then they lose their 30 cent-on-the-dollar investment and get nothing. If, however, the collection agency recovers just 50% of what is owed (i.e., 50 cents on the dollar), the collection agency has made a profit on a debt even though the consumer paid back only one half what was originally owed.
You see, usually collection agencies have "purchased", from the large creditor banks, the right to collect an individual consumer's debt for pennies on the dollar. Collection agencies purchase large lists of client debts, hoping to collect on as many of these debts as possible. The collection agency might have paid 30 cents for the right to collect each dollar owed by a consumer. If the collection agency doesn't collect anything at all, then they lose their 30 cent-on-the-dollar investment and get nothing. If, however, the collection agency recovers just 50% of what is owed (i.e., 50 cents on the dollar), the collection agency has made a profit on a debt even though the consumer paid back only one half what was originally owed.
How Does the Debt Settlement Process Work, Step-by-Step?
1. Once
enrolled in their program, your debt settlement company will notify each of your creditors that, because of hardship, you will no longer be able to make payments toward your account and
that you are immediately seeking a negotiated settlement of your debt.
2. Instead of making payments to your individual creditors each month, the monthly payment that you make to your debt settlement company will be banked for you by your debt settlement
company in a special savings account established in your name. Your funds will remain in this special account until a formal agreement to settle one of your accounts has been reached with
your one of your creditors. Only then, the funds will be drawn and sent to your creditor.
3. Your debt settlement company will remain in regular contact with your creditors and will keep negotiating on your behalf until an appropriate settlement is reached with each of your
creditors. As settlements are reached with your creditors, your debt settlement company will disburse the funds in your account to settle your debts. Some of your debts may be settled in
one lump sum but, more typically, funds will be released monthly to your creditors as you make payments to fulfill the terms of an an installment settlement.
Why can't I just bank my money on my own?
Beside the fact that making regular monthly payments to yourself takes lots of self-discipline and organization, keep in mind that the debt settlement process typically relies on the availability of at least some cash to settle debts. Creditors will usually trade off receiving the full amount of a consumer's debt over time in order to to receive some immediate cash payment on that debt. To be as effective as possible on your behalf, your debt settlement company needs to negotiate in good faith and that means offering a creditor funds that have already been banked, tallied, and readied for disbusement.
When will my debt settlement company contact my creditors?
Once all your paperwork has been completed and you are formally enrolled into a debt settlement program, your debt settlement company begins work on your case. Letters are sent out to each of your creditors notifying them that you are working with a debt settlement organization and seeking settlement of your account. Your creditors are also notified to cease all direct communication with you and begin forwarding all communication regarding your account to your debt settlement company.
Once all your paperwork has been completed and you are formally enrolled into a debt settlement program, your debt settlement company begins work on your case. Letters are sent out to each of your creditors notifying them that you are working with a debt settlement organization and seeking settlement of your account. Your creditors are also notified to cease all direct communication with you and begin forwarding all communication regarding your account to your debt settlement company.
Why do my creditors say they have not been paid, even though I have been sending payments monthly to my debt settlement company?
One of the
basic facts about the debt settlement process is that, once you enroll in your debt settlement program, your creditors will not be paid until a negotiated settlement on your behalf has
been reached and secured. This is in spite of the fact that you are making monthly payments toward your debt and this is for your protection.
Instead of going directly to your creditors, the monthly payment you make toward settling your debt will be banked for you by your debt settlement program in a special savings account assigned to you. You need to make payments each month and grow this account in order to assure that their will be sufficient funds available to arrange a settlement with your creditors. Typically, your creditors want at least some portion of the amount they settle for to be made in an initial lump sum payment.
If your monthly payments were forwarded to your creditors each month prior to the achievement of a settlement, your creditors would have no reason to negotiate--they would simply expect continuous payments until your entire debt obligation is fulfilled. If you had the ability to pay off the full amount of your debt, you would not need to be enrolled in a debt settlement program.
Instead of going directly to your creditors, the monthly payment you make toward settling your debt will be banked for you by your debt settlement program in a special savings account assigned to you. You need to make payments each month and grow this account in order to assure that their will be sufficient funds available to arrange a settlement with your creditors. Typically, your creditors want at least some portion of the amount they settle for to be made in an initial lump sum payment.
If your monthly payments were forwarded to your creditors each month prior to the achievement of a settlement, your creditors would have no reason to negotiate--they would simply expect continuous payments until your entire debt obligation is fulfilled. If you had the ability to pay off the full amount of your debt, you would not need to be enrolled in a debt settlement program.
What can I do to speed the process of getting my debts settled?
There are several ways to reduce your time with your debt settlement company and clear your debt obligations sooner.
(1.) Answer the creditor calls. Get the name, phone number, and location of the particular person calling you on behalf of your creditor and contact customer support at your debt settlement company with this information immediately. Your accounts are moved by your creditors from bin to bin and from agent to agent. It is extremely helpful to your debt settlement company, therefore, to know where the collector is calling from. Your debt settlement company will call the creditor as soon as they get the information from you and aggressively move forward the negotiation process.
(1.) Answer the creditor calls. Get the name, phone number, and location of the particular person calling you on behalf of your creditor and contact customer support at your debt settlement company with this information immediately. Your accounts are moved by your creditors from bin to bin and from agent to agent. It is extremely helpful to your debt settlement company, therefore, to know where the collector is calling from. Your debt settlement company will call the creditor as soon as they get the information from you and aggressively move forward the negotiation process.
(2.) Don't skip any monthly payments. Circumstances happen, that's part of life. But, when you stop your payments for even 1 month, that is 1 month longer you are in the program. If
you find that your payments are too high for you to afford each month, speak with the customer support department at your debt settlement company.
(3.) Stay in touch with your financial coach. Your coach will help you track your spending & develop a workable budget. He/she may be able to help you additional money to put in your debt settlement account . The more money you put into the program, the faster a settlement can be negotiated. Most of the time when a settlement is arranged, a payment plan is set up. Regular meetings with your financial coach will help you meet the obligations of your monthly installment plan without interruption and help you clear your debt according to schedule.
(3.) Stay in touch with your financial coach. Your coach will help you track your spending & develop a workable budget. He/she may be able to help you additional money to put in your debt settlement account . The more money you put into the program, the faster a settlement can be negotiated. Most of the time when a settlement is arranged, a payment plan is set up. Regular meetings with your financial coach will help you meet the obligations of your monthly installment plan without interruption and help you clear your debt according to schedule.
If I get some extra cash, can I put it in my debt settlement bank account?
Absolutely. Increasing the funds available in the account that has been established for you by your debt settlement company will, of course, speed up the process of clearing your
debts. But, before you direct additional cash toward repayment of your debt, speak with your Financial Coach. Your Coach will help you evaluate your budgetary situation and make
sure that you have adequately considered all the various needs you and your family already identified and that you have sufficient potential emergency funds put aside. After all,
there's no sense in speeding up the process of getting out of your current debt if you are only to quickly sink yourself into new debt because of lack of savings.
How do I work in partnership with my debt settlement company?
Your debt settlement company will represent you to your creditors and then negotiate on your behalf to achieve a settlement. But, keep in mind, achieving a successful debt settlement is
really a collaborative process or partnership between you and your debt settlement company. Your debt settlement company will handle the negotiations with your creditors and make sure all
settlements are secured and backed up with the proper documentation. You need to make the agreed upon monthly payments that go into the bank account your debt settlement has
established for you so that settlements can be reached.