Some Americans reach a point where they’re unable to keep up with their debt payments; where even making minimum payments to keep accounts in good standing becomes a struggle. This is especially true of borrowers who are dealing with financial hardships, like getting laid off at work, suffering an injury or illness, experiencing a death in the family or dealing with the fallout of a natural disaster.
As the debt keeps piling up, borrowers in this situation may realize it’s unlikely they will be able to repay their debts in full. Taking no action will result in interest continuing to accumulate in the background while filing for bankruptcy will leave a negative mark on their credit report for seven to 10 years. So, it’s worth considering an option between these two extremes: Trying to settle debts.
The idea behind debt settlement is seeing if creditors will agree to accept less than you originally owed in exchange for getting paid in a timely manner. You can try to tackle this task yourself, or you can avail yourself of settlement services for a fee.
Do your research to figure out which path forward best suits you, and to learn about the possible risks and rewards of each approach.
What to Expect from Do-It-Yourself Debt Settlement
Some people decide to pursue debt settlement on their own to avoid having to pay fees. This approach involves picking up the phone and negotiating with creditors on your own — in hopes they’ll recognize your hardship and agree to accept a lesser sum rather than risk you defaulting on your obligation.
Here are some tips to keep in mind ahead of these negotiations:
- Start by making an offer lower than you can afford but expect your creditor to counteroffer.
- Always remain polite, professional and positive.
- Get any settlement agreement you reach in writing.
- Consider offering a lump-sum payment if you can save enough money ahead of time, as creditors will often accept less money if it’s in the form of an expedient, one-time payment.
Be aware that different creditors may handle these types of negotiations very differently, with some accepting settlement terms and some refusing to play ball. If you have five credit cards, a medical bill and a personal loan on your plate, expect to have to contact all your creditors regarding each individual account.
Nolo recommends mentioning outright that you may have to file for bankruptcy in the future and to start with an offer around 15 percent to start — with the idea that you’ll hopefully be able to find an agreeable figure less than 50 percent of what you owe.
What to Expect from a Debt Relief Program
Debt relief programs harness the same principles, but the process is a bit different for people who decide to work with a settlement firm rather than handle it on their own.
Part of following a debt relief program is making monthly deposits into a special account until you have enough to start negotiating. If the teams reach an agreement, you’ll have to sign off on it before the funds transfer from your account. You can expect to pay the program a fee — you’ll be able to learn the exact figure before you sign up. Remember, reputable settlement companies will only ever charge you fees after an account has been resolved; charging advance fees is actually illegal.
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