If you’re in a situation in which wondering how you’re going to get control of your bills, it might be time to consider debt settlement. Around for a very long time, this strategy can help you get on the road to financial freedom. However, before you avail yourself of such a program, it’s a good idea to learn what to expect from debt settlement.
How Does It Work?
Debt settlement companies work with creditors to get them to agree to forego a portion of what you owe in exchange for partial payment of the agreed-upon balance. Under debt settlement, rather than continuing to pay your bills monthly, you’ll deposit the money into a third-arty held FDIC-insured escrow account from which the funds will be drawn to satisfy these balances once they are successfully negotiated.
What Kinds of Debt Does It Cover?
Credit card debt, charge cards, revolving accounts, personal loans, medical bills and other unsecured obligations can be relieved with debt settlement. The strategy can also be applied to certain private student loans. However, mortgages, car loans and public student loans cannot be settled in this fashion.
How Will My Credit Be Affected?
Odds are, your credit score has already been impacted if you’re considering debt settlement. Further, when you stop paying your creditors to build up the settlement fund it will be affected again. However, once your settlements are in place and successfully executed, your credit score will recover—providing you then stay on track financially.
What About Taxes?
The IRS will see forgiven debt as income and might tax you on it. However, this varies by the amount your creditors agree to forego. Your best bet would be to consult a settlement company and see how much of your debt qualifies, then talk to a tax professional to get an estimate.
How Much Can I Expect to Save?
In a lot of cases, negotiators can get lenders to agree to waive between 15 and 35 percent of outstanding balances. With that said, the exact amount varies from situation to situation. Further, not all lenders will agree to accept settlements. This makes it difficult to say how much exactly.
How Long Does It Take?
This too varies depending upon the amount of debt, as well as how long it takes you to build up your settlement fund. In most cases though, it takes between 24 and 48 months for a debt settlement program to run its course.
What Will It Cost?
While fees typically average around 21.5 percent of the settlement amount, they vary from company to company. However, you’ll only pay for the accounts actually settled.
Do I Pay Up Front?
Legitimate debt settlement companies charge no fees whatsoever until a debt is negotiated and settled. In fact, Federal law prohibits settlement companies from accepting payment for negotiating on your behalf until an agreement is reached, approved by you and paid.
Why Does It Work?
When experienced lenders hear from a reputable debt settlement company, they know your financial situation has been evaluated and determined to be serious. If they don’t work with you, your next option will likely be bankruptcy, in which case their account could be discharged altogether. Accepting partial payment looks a whole lot better t o them than taking a chance on getting nothing at all.
How Can I Know a Company Is Legitimate?
When you hear answers varying from those above while interviewing debt settlement companies, you’re looking at either an inexperienced firm, or worse—an illegitimate one. If you’re careful though, you can find qualified help, such as that provided by companies like Freedom Debt Relief
In addition to solid answers to all of the above, you want a company with at least 10 years of experience and accreditations by organizations such as the American Fair Credit Council.
Now that you know what to expect from debt settlement, it could well be the solution you need. However, before you sign up with anyone, take some time to carefully evaluate your situation to be certain an option such as debt consolidation might not be a better move.