Depending on whether you’re working with a debt collector or the original creditor, a creditor will usually agree to accept 40% to 50% of the debt you owe, though it might be as much as 80%. In either situation, your initial lump-sum offer should be much below 40% to 50% of the total to leave room for negotiation.
What is a debt settlement program?
Debt settlement occurs when your debt is settled for a lower amount than you owe now, with the commitment that you will pay the agreed-upon sum in full. Debt settlement, also known as debt relief or debt adjustment, is normally handled by a third-party organization, though it is possible to do it yourself.
Debt settlement entails negotiating with creditors to minimize the amount you owe significantly. Unlike less drastic debt relief options such as debt consolidation or a debt management plan, debt settlement simply requires you to repay a part of the principal you owe.
There are several approaches to debt settlement. A third-party business or a lawyer typically handles it, and you’ll have to pay them a set fee or a percentage of your assets in exchange for their services. This means that even if your debt is settled for less than you owe, you will still be responsible for additional expenses not covered by your existing debt.
You must agree to the new conditions after a settlement is reached, whether it’s a lump-sum reduced amount, a lower monthly payment, or a debt cancellation. This is required for the settlement to proceed, but you are not required to agree to any terms if you do not choose to. You’ll make payments to the company handling your debt until your outstanding debt is paid in full, depending on how the debt was settled.
What is a good debt settlement offer?
If you can afford it, offering a lump-sum settlement is usually the best option—and the one most collectors would accept.
If you opt to pay a single sum to settle the debt for less than you owe, keep in mind that not all collection agencies follow the same rules. Some creditors want 75%–80% of what you owe. Others will accept 50%, while others will accept one-third or less.
What are the pros and cons of debt settlement?
Debt settlement is a valid and legitimate option, but only in particular circumstances. It may have bad consequences for your financial state and credit score.
Benefits of Debt Settlement
- Get out of unbearable debt and pay off your debts more quickly – You might be able to pay off your debt in two to four years if you use a legitimate debt settlement program. Repayment plans for debt consolidation, bankruptcy, and credit counseling, for instance, typically take longer.
- Avoid bankruptcy – Consumers in debt are frequently unable to choose between debt settlement and repaying their entire amount over a longer period of time. The traditional approach has failed them. Debt settlement versus bankruptcy is frequently the decision. Creditors may not express it explicitly, but debt settlement ensures that they receive some compensation. It’s usually an admission that they’ll get much less money if someone declares Chapter 13 bankruptcy, and maybe nothing at all if they file Chapter 7.
- Your debt will not be charged-off or sent to collections – Debt settlement can help customers avoid having their debt sold to a debt collection agency or being sent to collections.
- Avoid being sued for your debt – You may have a varied perspective on what defines a worst-case scenario depending on your circumstances. Everyone’s first priority is certainly a lawsuit. Debt settlement may help you avoid getting sued for credit card debt and being dragged through a lengthy legal battle.
Disadvantages of Debt Settlement
- Debt settlement fees – Many debt settlement companies impose exorbitant fees, ranging from $500 to $3,000 or more. These fees, however, are not applied to your debt; instead, they go right into the wallets of the collection agencies.
- Impact on credit score – Debt settlement, while not as damaging as bankruptcy, will have a negative influence on your credit score if you negotiate directly with your creditors, as the creditor may report the settlement to each of the three major credit bureaus. This will have an impact on future loan terms, credit availability, job opportunities, and other factors.
- Holding funds – A debt settlement company may compel you to pay a big lump sum, allocated for debt repayment, which it retains in escrow for months or even years, as some consumers have reported. While little progress is made on your case, the provider claims it requires the time to “negotiate” with your creditors. It simply stores your money, which you could put to greater use. Worse, if you’ve signed anything giving them rights to the money (even if you didn’t realize it), providers may refuse to return it.
- Tax implications – You may still be accountable for taxes on the reduced debt if a creditor agrees to settle your debt in exchange for a lower payment. The creditor is required to notify the IRS if the settlement resulted in a debt reduction of $600 or more.
- Creditors may refuse to negotiate with you about your debt – It’s possible that the debt settlement business you’re paying won’t be able to reach an agreement. Each creditor decides whether or not to settle their debt. Some creditors refuse to work with debt settlement companies outright.
- You can find yourself in more debt than when you started – If you stop paying on a loan, you risk incurring late penalties and interest. Furthermore, just because a creditor agrees to reduce the amount you owe doesn’t mean you’re free and clear on that loan. On your federal taxes, forgiven debt could be deemed taxable income.
What is a debt settlement company?
To decrease or eliminate your debt, a debt settlement organization operates as a middleman between you and your lenders and creditors. An experienced guide can sometimes be beneficial in guiding you through an unfamiliar process.
However, before working with a debt settlement business, learn about their method and check customer evaluations. Different debt settlement companies provide different terms, so do your homework.
Who is the best debt settlement company?
Here are the top debt settlement firms in 2022 if you’re ready to settle your debt for a fraction of what you owe.
- National Debt Relief
- Accredited Debt Relief
- Freedom Debt Relief
- Citizens Debt Relief
You can also check out the following companies: New Era Debt Solutions, Pacific Debt Inc, Century Support Services, and DMB Financial.
How much does debt settlement affect your credit score?
Debt settlement can lower your credit score by more than 100 points, and it lasts for seven years on your credit report. If your creditors terminate accounts as part of the settlement, your credit utilization may rise, lowering your credit score.
Your accounts may already be past due or will become past due when you make payments to the debt settlement company because creditors are motivated to settle a debt only when they believe it is the only way they will be paid.
How long does it take to improve your credit score after debt settlement?
It normally takes 6 to 24 months for your credit score to improve. It all depends on how bad your credit score is once you settle your debt. After three months of debt settlement, several people stated that their mortgage application was granted. Some people had to wait years for a new credit card or loan.
It varies from case to case, and determining the exact duration required to increase your credit score is challenging. The length of time it takes to improve your credit score is mostly determined by your credit history.
How much does a debt settlement lawyer cost?
To negotiate with your creditors, the attorney may charge you an hourly fee. In that situation, the lawyer may agree to accept payment on an hourly basis or request a retainer (a one-time payment) to begin negotiations. The hourly rate of an attorney is determined by various factors, including the lawyer’s level of expertise and where you live. A debt negotiation attorney can charge anything from $125 to $350 per hour in most circumstances.
What should a debt settlement letter include?
In a debt settlement letter, you should inform your creditor about your financial predicament. The letter should also specify the amount of money you want to spend to repay your obligation. You have the option of writing your own debt settlement letter or hiring a debt settlement company to do so for you.
The following should be included in your debt settlement proposal letter:
- Your current financial situation
- Debt settlement offer
- Personal information
- What you expect in return