Thinking about settling your debts? Hang tight- it may not be the best option for you. If youâ€™re reading this, you probably have some questions about the debt settlement process.
I used to work for some of the biggest debt settlement companies, and I can tell you right off the bat that you should tread with caution. Debt settlement can be an effective approach to paying off your debts, but what exactly are the ramifications?
Misleading Advertisement on saving 50-60% of your debt
Have you seen advertisements stating that you can knock out 50-60% of your overall debt amount? Seems too good to be true, right? Itâ€™s not uncommon for companies to settle your debts for as low as .20 cents on the dollar, but hereâ€™s the real kicker.
If you have a credit card with a balance of $10,000 and you stop paying your creditor, youâ€™re going to accrue late fees that can be thousands of dollars. Now all of the sudden, that $10,000 balance is now $12,000 and your savings is reduced.
Now Add On The Fees and your Savings Is Dramatically Reducedâ€¦
The good news is that debt settlement companiesÂ are not allowed to charge upfront fees prior to your debts being settled. The bad news, however, is that the fees they charge can be quite a lot. Most debt settlement companies charge anywhere from 10-20% of your total debt amount. So if you enroll in a program with $10,000, youâ€™re looking at $1,000-$2,000 in total fees. Â Add that to the settled amount of 40%, youâ€™re ultimately going to pay $5,000-$7,000 for the program.
Â Whatâ€™s the Current Status of your Debts?
Whether or not you should enroll in a debt settlement program really depends on your current situation. You should NOT enroll in the program as an easy way out of getting debt free. One thing for certain is that youâ€™re going to immediately regret your decision if this is the case.
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So how do you know if you debt settlement is right for you? Follow this simple breakdown.
Are you on time with your payments? If so, do not enroll. If your payments are too high and you canâ€™t manage it, enrolling in a debt management program might be more beneficial.
Are you already 1-2 months behind? Again, consider a debt management program instead. They might be able to put your past due payments in arrears.
Do you have family or friends that might be able to help you pay a settlement if itâ€™s reached ahead of time? If so, debt settlement might work.
Are your accounts already in collections? Would be a perfect fit for debt settlement.
Do you have a Capital One account? Beware, your settlements might not look that attractive with Â them.
Iâ€™m Leaning On Enrolling in the Program, what should I expect?
If youâ€™ve decided to enroll in the program, I want to wish you the best of luck. The debt settlement company will do a simple mathematical equation. If you have $10,000 in debt, they will assume that you will settle your accounts for .40 cents on the dollar ($4,000). They will then add in their fees, 15% or $1,500. Your total cost of the program is $5,500.
They will break down the $5,500 dollars into 2-4 years: which is $229 or $114/month, respectively. Those payments look appealing, right? Keep in mind that this payment doesÂ not go towards your creditors. These payments are being kept in an escrow account. No one touches it until youâ€™ve reached enough funds to settle your account.
Throughout this process, you will receive calls from collection companies trying to collect the debt. They will call you throughout the day from different numbers. The debt settlement companies canâ€™t do anything about this except to send a cease & desist letter, which in my opinion, is not the best idea.
Your creditors might also sue you. They will get a judgment and your wages might be garnished (there are state-by-state guidelines on this). If this is the case, thereâ€™s a chance you might have to file for Chapter 7 or 13 bankruptcy to avoid this.
Sounds Like a Mess, Right?
Indeed it is. Debt settlement can be a dangerous path. Your credit score will be ruined and youâ€™ll have to rebuild your credit from scratch. If your accounts are already in collections and your credit has already taken a hit, it might not matter.
Before looking into a debt settlement program, try looking through these options first:
Call your creditors. Youâ€™d be surprised at their willingness to work with you. They might lower your interest rate or put you on forbearance. You wonâ€™t know until you ask.
Talk with a credit counseling company. One of the options they will recommend is a debt management program (DMP). This program lasts anywhere from 2-5 years and it will dramatically reduce your interest rate and payment.
Look for a debt consolidation loan. You might think that this route wonâ€™t work since your credit might be less than perfect, but there are many online lenders that lend to consumers with low credit scores.
So if youâ€™re thinking about enrolling in a debt settlement program, think long and hard about this. Make sure youâ€™re prepared for all the consequences and make sure youâ€™ve looked through all the options.
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This post was published by Kevin Yu, Content Manager and Writer for Â»Â ReadyForZero.
ReadyForZero is a company that helps people get out of debt on their own with a simple and free online tool that can automate and track your debt paydown.Download