There are times when debt obligations can be quite overwhelming and one finds themselves unable to pay their debts on time. This can be quite stressful because the debtors can be calling you daily giving you sleepless nights. If it reaches this point the alternative is to seek a debt settlement from your creditors where you ask for a reduction in the amount owed. Debt settlement usually comes into play when there are many late payments or you are not able to keep up with your debt obligations or you have skipped several payments. There are many companies out there that promise things that are not possible like a guarantee to make the debt go away or that they will reach an agreement on the debt which is less than what you actually owe. To avoid falling into such traps it’s important to carry out due diligence to know how debt settlement works. Debt settlement can be a good thing but it has its downside that is why it is important to know everything there is to know about the debt settlement plan before you commit.
How debt settlement plan works
A debt settlement is an arrangement that is typically made between the creditor and the customer where one is allowed to pay a reduced lump sum they owe as compared to paying back in installments or monthly. This service or program is offered by a third party who negotiates on your behalf so that your debt is reduced on the basis that you will be able to pay all of it at once. one can also opt to do it by themselves but it’s always advisable to work with a debt settlement company to increase your chances of success. The third-party offering the services that help you get out of debt contacts your creditor on your behalf and negotiates a better deal for you. The company charges a fee typically a certain percentage once the settlement has been finalized since by law they are not allowed to collect fees upfront.
Debt settlement plan benefits
There are a couple of benefits to seeking a debt settlement plan, and the key benefit is that the debt you owe is reduced to a level that you are able to pay. Another benefit of this service is that you get to avoid declaring bankruptcy which can greatly affect your ability to borrow in the future. Another advantage is that you can enjoy peace of mind because once the agreement has been reached and you can pay off their debt as agreed then they will stop calling or threatening you with a collection action.
Debt Settlement risks
As much as the debt settlement plan is a good one it carries a number of risks, this is because opting for this service means that your credit score will be affected. One reason for this is that in some instances, you may be required to stop paying your debts as the process of getting a settlement is in progress. This however does not mean that the debt you have is not accruing interest. This means that it will become increasingly difficult to secure another loan as you may be considered a high-risk borrower. Another downside of this service is that you can face hefty charges, fines, and fees as you look to get your debt reduced. One also incurs charges in payment to the debt settlement company for the service rendered. The charges which are incurred are not counted as part of the debt but they are paid to the agency so you may pay a little more. When the creditor agrees to lower the debt owed, one still has to pay tax on the money saved. This is because it’s still considered income which is taxable as per the law.
Other key considerations
It is important to note that not all debt settlement plans work and it’s not necessarily that your debtor agrees to reduce the amount owed. This is because there are times the negotiation can hit a brick way and the third party fails to agree with your creditor. In other words, there is no guarantee of success. It is also important that the process takes time, meaning that the process of getting your debt settled to where you can pay in a lump sum can take at least three to four years. This means that you have to be patient and it also means that during this time you will need to build a savings account where once the case is finalized the payment can be made in lump sum.