Are you barely staying above water making the minimum payments each month? This might seem like the only viable strategy available but in reality, you’re only spending more money in interest each month. Financial freedom is nowhere near. What are you to do? Sell all your things? Set a strict budget? Move in with family?
All these measures are good ideas if your debt has gotten out of control, but depending on the amount you owe, they might not be enough to save you. While debt settlement certainly isn’t the wisest option for all debtors, it can be an effective last resort in dire situations. If this is you, we’ve put together some dos and don’ts of debt settlement that any person should consider before engaging with a debt settlement provider.
Do Know Your Debt
You obviously want to settle your debts as soon as you can, but before you start the process of vetting debt relief providers, you need to know all your financial details, such as the exact amount of debt you’re in, how many payments you’re behind for each account or loan, your documented income, and your assets. These might sound like obvious details that anyone should know, but you’d be surprised how many people underestimate their true debt.
Once you know your debt amount in relation to your other financial details, you’ll have a better idea of whether your situation qualifies for debt settlement or if you’d be better suited for a different get-out-of-debt plan, such as credit counseling, debt consolidation, refinancing (if you have a mortgage), or even bankruptcy.
Do Your Research
There are a lot of debt relief companies to choose from, but they’re not all created equal. While the internet offers a wealth of insight, there isn’t an overall consensus as to the efficacy of debt settlement companies. Many have been around for years, helping thousands of customers and settling millions of dollars in debt. Then there are other ones that pop up, hoping to prey on people looking for a way out. These companies will try to charge you for services before providing them and steer you toward debt settlement, even if your situation applies more to a debt management or consolidation plan.
Do Keep Communicating with Your Creditors
One of the red flags the Federal Trade Commission (FTC) warns against is debt relief companies that instruct you to stop communicating with your creditors. There’s nothing abnormal about a debt company instructing you to stop paying your bills; letting bills go past due is a part of how the debt settlement process works. But be weary of any company that wants to you to end communication with your creditors. In fact, cutting off contact with your creditors could worsen your situation.
Don’t Forget the Cons
Debt settlement can put people on a track toward financial wellness, but that’s not to say it’s without downsides. For one, working with a debt settlement provider will ultimately hurt your credit score. However, it’s worth nothing that depending on how far behind you are on your payments, your credit score might already be shot, leaving nothing to preserve.
Another important thing to keep in mind is that should any of your debt be forgiven or canceled, you could be required to pay tax on it. Many people don’t factor possible taxes into the equation and after paying the debt settlement fees, realize they haven’t saved as much as they thought.
Don’t Pay Fees Before Your Debt is Settled
Legitimate debt relief companies do charge fees, typically in the 15-25 percent range, but you’re only required to pay those fees after a few things happen, as laid out by the FTC:
- A successful debt settlement result must have been reached.
- An agreement must be made between customer (orally) and creditor (in writing) on the settled debt.
- A customer has made a payment to the creditor as a result of the negotiated agreement.
Don’t Expect a Quick Resolution
If you’re best suited for debt settlement, be aware that the process doesn’t happen overnight, or in a year. Most reputable companies offer a resolution timeline between two and four years. The reason the timeframe is so big is because the amount of debt, the creditors involved, and the number of payments a debtor is behind all differ depending on each situation.
There are a lot of details to consider when researching debt settlement companies, but the number one rule is, if it sounds too good to be true, it probably is. Many debt settlement providers have undoubtedly helped countless debtors shed their financial burden, but the process isn’t quick, it’s not cheap, and it’s not without its other cons. But that doesn’t mean it can’t be a decent solution, especially if you don’t know where else to turn.