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Debt Settlement Basics

Dealing with debt is a challenging financial situation. How you decide to approach this situation varies based on numerous factors. Credit debt management must always be carefully thought through considering your current as well as future financial goals. It is important to do so because how you choose to deal with your debt decides the health of your financials and financial worth to potential creditors. Credit is a positive thing if managed right. However, if you choose the incorrect path, credit can easily damage your finances beyond recovery.

On most occasions, a debt management program can steer your ship in the right direction. However, sometimes other consequences may lead to options such as debt settlement. While debt settlement is not all bad, it is definitely not a one size fits all type of solution to your debt management problems. Therefore, if you are considering this option you must be aware of the ins and outs of this option. Let’s dig in deeper on some debt settlement basics.

debt settlement basics

Debt Settlement Basics: What is a Debt Settlement Program?

When your personal debts become more than you can handle, a debt settlement solution is tempting. Debt relief companies that offer settlement services advertise those services aggressively. it is almost like bait to the struggling consumers looking for a way out. But while a debt settlement solution may be appealing at first glance, this approach to addressing your debt problems has substantial disadvantages.

A debt settlement program is designed to help you settle debt with your creditors for less than you owe. Some settlement services advertise that they can settle your debt for pennies on the dollar. When you enroll in a debt settlement program, you’ll stop making monthly payments to your creditors and instead will put money into a savings account managed by the debt settlement company. After several months, when your accounts become seriously delinquent, the company will approach your creditors and offer to settle your debt for less than the amount you owe.

Make the Right Choice for Your Future Finances

Understanding the debt settlement basics is important for you to make the right choice for your finances. While a debt settlement program may work for some consumers, there’s no guarantee that your creditors will want to settle the debt in this way. You may end up owing additional penalties or you may be sued by your creditors. If you’re able to settle, you’ll likely owe a hefty fee to the debt settlement program. In addition, you will also have to pay taxes on the debt that was forgiven.

The next important thing when it comes to debt settlement basics is its impact on your credit. When your accounts go delinquent, your credit rating will inevitably take a hit. For several years, you’ll likely have trouble applying for credit, buying a car, getting a loan, or building your financial future. These are crucial financial moves in your life. Having a negative impact on all or any of these activities can seriously hinder the quality of your financial life.  Therefore, you have to be sure that you fit the profile before signing up for a debt settlement program. Reputable credit counseling agencies such as ACCC can help you understand if you are making the right decision when it comes to your debt.

Pros & Cons

Before you apply for debt settlement, it’s wise to understand the pros and cons of a debt settlement arrangement. The biggest advantage when it comes to this type of debt solution is that you may get out of debt more quickly and for less than the total amount you currently owe. When you work with a settlement company, their representatives will handle communications with your creditors, relieving you of the responsibility of some difficult conversations. If done right, these are really good positives that may get you back on track quicker.

On the contrary, no debt settlement is guaranteed to work. Your creditors are under no obligation to settle your debt for less than what you owe. And because debt settlement involves not paying your bills for several months, you may end up with additional penalties and interest, legal bills, and calls from collection agencies. Debt settlement can be expensive, too. You may pay as much as 25% of the money you save to the settlement company. Also, you will likely have to pay taxes on those savings as well.

Apart from these, the biggest drawback is the impact on your credit. No matter the outcome on your debt, your credit rating will take a serious hit in the process. Recovering a seriously damaged credit rating takes a lot of time and effort. And in the meantime, any potential financial obligation comes with a serious barrier.

Debt Settlement Basics: Credit Impact

Given the impact on your credit, you must explore this area a little bit more in detail. What do you really need to know when it comes to the credit impact of debt settlement? How bad does debt settlement hurt credit scores? Debt settlement credit impact varies by each person and their financial situation, but consumers who pursue debt settlement may have a negative credit rating for up to seven years. So why is there a negative debt settlement credit impact?

How does debt settlement affect your credit exactly? Debt settlement credit impact results from the steps you take to get creditors to accept a payment that is less than what you owe.

When you hire a debt settlement agency, that company will immediately instruct you to stop paying your bills. You will also be directed to put that money into a savings account. After a period, when your creditors are deeply concerned about your ability to make payments, the settlement agency will offer to settle your debt for a lump-sum payment that is a portion of the total amount owed. Some creditors will take this offer, believing it’s better to get part of the money rather than none. Other creditors may decline the offer. They may choose to take you to a court or to hire a collections agency instead.

Whether your attempt to settle debt is successful or not, the fact that you have stopped paying your bills results in a negative debt settlement credit impact. As a result, your credit rating will likely be damaged for years. That’s why, before you enter a debt settlement arrangement, it’s important to talk with a financial professional about your potential debt settlement credit impact

Considering Debt Settlement?

Before you enter a debt settlement arrangement, it’s helpful to get debt settlement advice by talking to financial professionals who can help you decide if this is the right course for you. At American Consumer Credit Counseling (ACCC), we offer free credit counseling sessions where you can work with professionally certified counselors to:

  • Take stock of your finances, consider all your options and
  • Help choose the most advantageous path out of debt

Our counselors can help you understand the debt settlement basics. They will analyze the and the debt settlement credit score impact. Their professional analysis will also determine whether debt settlement seems like the best choice for your financial situation.

Getting rid of debt is a financial priority for all of us. The path you choose to take and the professionals with who you choose to partner will make or break your financial future. Therefore, a thorough understanding of debt settlement basics can help you make an informed decision.

Seek an Alternative Approach

As a nonprofit organization, ACCC is dedicated to helping consumers get out of debt fast and live debt-free in the future. That’s why ACCC recommends a debt management program over debt settlement.

With a low-cost debt management plan, ACCC will help you create a budget you can live with while you pay down your debt as quickly as possible. Rather than paying multiple creditors each month, you’ll make one payment to ACCC. We will pay all your bills on your behalf. This does a few great things:

  • It simplifies your finances
  • Makes it easier to stay current with creditors
  • Allows us to seek reductions in interest rates, fees, and payments that can help you pay your debt off more quickly.

We’ll also guide you to educational materials and resources that can help you learn more about managing money. Developing good financial habits can help you learn to live without debt. No one can live completely debt-free. Debt is a good thing to have as long as you manage it well. When it comes to situations where you need help, it is important that you choose the right course of action to fit your needs.

If you are seeking debt management help speak with the professionals at ACCC today. Call 800-769-3571. 

ABOUT AUTHOR / Dilini

Dilini is a Marketing Communications & Programs Associate at ACCC. To anyone, managing finances can be a real challenge! Any tips and tricks to help get through this are great! Dilini will share her experiences, tips, and tricks along the way through the Talking Cents blog. Stay tuned!

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