5 Tips for Financial Recovery Through Debt Settlement
Debt Settlement
Different methods for debt relief are available to slowly but surely improve the financial situation when people fall into debt.
However, if one has a load of outstanding debt and cannot make regular monthly payments, they may default on their debt. Then, they are at the risk of bankruptcy.
If the creditor or debt collector comes calling, debt settlement is a possible choice.
You can get expert help from a debt settlement company or directly take charge of the debt negotiation process.
For the best experience, you need to proceed with specific steps.
What Exactly Is Debt Settlement?
Debt settlement is the process that debtors take where they negotiate formally with their lender about reducing their owed payment amount for partial settlement.
To elaborate, the debtor pays a lump sum part of the debt as a partial payment. In exchange, the rest of their originally owed amount is no longer necessary to pay off.
For people with a high amount of debt from personal loans or revolving debt from credit cards, debt settlement is most suitable to reduce their financial burden.
How Does the Process Work?
For example, if you have a credit card debt of $20,000, you can negotiate with your lender to settle this debt.
Typically, this can range between 10-50% of the outstanding balance you owe, depending on the creditor’s agreement.
Let’s say you proposed to settle your debt at 50% of the originally owed unsecured debt amount, and the lender accepts.
As per the agreement, you have to pay $10,000 in lump sum payment of your personal credit card debt.
The rest will be forgiven. However, that becomes taxable income under IRS guidelines, and federal income taxes will apply.
Which Debts Are Eligible for Debt Negotiation?
Certain debts eligible for this process, specifically those that are unsecured debts, include:
- Debt from personal loans
- Revolving debt from not paying monthly credit card bills
- Medical debt
- Debts sold to debt collection agencies
Is Debt Settlement a Good Step Towards Financial Recovery?
Often, a concern arises whether debt settlement is suitable for financial recovery.
Yes, there are different methods available to regain financial stability.
Debt settlement is one of them. It works best for extreme-level cases where the debtor’s financial condition is at an all-time low.
You can contact a credit counselor from a reputable credit counseling agency for better advice on managing your finances after settling all debts.
With time, you can successfully stabilize your capital and recover your financial health.
When is it appropriate to negotiate a settlement?
As a debtor, you can negotiate a settlement with your creditors on your outstanding balance from past loans and credit card bills.
However, only those with past-due bills should use this debt relief technique.
Consider other options if you can settle your debt with a credit card company or another lender with a repayment plan adjustment.
There are more manageable methods like debt management or debt consolidation loans for eliminating debt.
Most creditors will accept a debt settlement deal from their debtor, who constantly misses payments. Even partial repayment is better than no payment at all.
So, contact debt settlement companies or negotiate a settlement agreement directly if you are behind on repayments by five months or more.
However, you will likely continue missing payments during the negotiation process. These will add to your credit report and impact your credit score.
So, apply to settle a debt after you check that you have sufficient money to at least pay the settlement amount and fees.
Discuss with your debt settlement specialist or a credit counselor from a verified credit counseling agency how you can manage your finances after settling your debts and returning to a stable financial condition.
5 Strategies to Follow for Settling Your Debt Successfully
You can follow specific strategies to negotiate a settlement on your existing debt and get debt forgiveness for the remainder from your creditor.
Research the legal protections and rights available to you.
After debtors fail to complete debt repayments continuously, creditors pass the collection responsibility to third-party debt collectors.
However, they are still subject to federal laws, namely the FDCPA (Fair Debt Collection Practices Act).
The Federal law ensures a fair debt collection process, with regulations related to permitted hours for collection calls, the frequency of calls, etc.
Plus, it relates specifically to debts from mortgages, credit cards, student loan payments, medical bills, and legally binding household debts.
As the debtor, you should know your protections and rights under FDCPA. Benefits include:
- You will know if the debt collectors contacting you are following the correct protocols.
- You can also recognize debt settlement scams when you know your laws well.
Research your financial condition and existing debts first.
If you have multiple debts from different sources, like your credit card bills, personal loans, etc., check their details, like interest rates.
Also, you should check your current financial condition. Then, you can understand how much money you can realistically pay off to settle your debts alongside the additional fees.
Start with a low settlement offer.
When you present a settlement offer to the creditor, expect them not to accept the first deal.
In most cases, creditors continue requesting counteroffers until both parties reach a suitable agreement on the settlement terms. So, it would help if you started with a low offer first.
For example, request to settle 25% of your remaining debt in lump sum payments and forgive the rest.
You should maintain a level of persistence during the negotiation process. Remember that the procedure can extend for a long time, so keep a patient mindset.
Keep records of communications with the creditors.
You should keep a record of your interactions with your creditors for future reference. This includes all of your correspondence over emails, phone calls, financial documents, etc.
In general, the detailed records will help you track information related to your original debt, like dates of payments, decided interest rates, credit reports, etc.
In the context of settling debt, you should get the agreement details in writing from the creditor, including:
- Payment terms
- Initially owed amount
- Settlement amount
- Bank account information
You can refer to the records to verify your original agreement if any disputes or misunderstandings occur. Recording everything ensures a fair process for both parties.
It will also protect you legally in case your creditor who agreed to a certain settlement deal backtracks later. So, keep detailed communication records consistently.
Continue following a reasonable budget plan.
Focus on improving your savings and follow a consistent budget. Avoid making big purchases, like spending money on luxury items or other unnecessary expenses.
During debt settlement negotiations, the creditor will check information like your credit card statement.
If they see that their debtor cannot pay bills but still buys expensive items on the credit card, they will likely reject the debt settlement plan.
You should avoid buying things with your credit cards for at least 3-6 months before applying for a settlement with your creditor.
DIY Debt Settlement or A Debt Settlement Company- Which to Choose?
You can convince the lender directly or approach a debt settlement company for their support with the negotiations.
However, you are liable to pay fees in case of the latter.
On the other hand, the debt settlement specialist has more professional experience and training.
They can help negotiate a mutually acceptable settlement agreement between the creditor and lender. Depending on what you prefer, you can choose either route for debt settlement.
Author Bio:
Loretta Kilday, an attorney with over 36 years in the field, specializes in business, collection, and family law, providing expertise in litigation and transactional matters. She often shares her knowledge through writings on various financial and legal topics. Loretta earned her Juris Doctor degree from DePaul University and serves as a spokesperson for the Debt Consolidation Care (DebtCC) online debt relief forum. For additional information or to connect, please find her on LinkedIn.
Category: Debt
