Debt settlement involves hiring a debt settlement company to negotiate for a lower amount of your unsecured debt such as credit cards and personal loans. The debt settlement company will attempt to negotiate with every single creditor. The goal of the debt settlement company is to make your financial situation look desperate by encouraging you to stop making payment to your creditors.
Many creditors would agree to a lump sump as settlement for your debt because they believe that doing so enable them to reduce their losses than selling your account to the debt collection company. The debt settlement company will ask you to make payment of a fixed amount to a savings account for a period of time. Once there are enough savings, they will contact all the creditors that you owe money on and ask them to agree to a certain lump sum amount. The lump sum amount will be lesser than the amount you originally owe.
The debt settlement company will charge you a fee for helping you to negotiate with your creditors for a favorable settlement amount. They may also charge you a contingency fee that is based on how much you save from the settlement. There are two main ways the fee is charged. The first method is to charge you with a percentage of the total debt you owe. This method usually involves paying less than 20% of the total debt. The second method is to pay a percentage of the settlement amount. The fee percentage for the second method can be as much as 35% of the debt that has been settled.
There are lots of advertisements that promise to settle your debt by half the amount you originally owe but you must be very careful about this. It is always best to hire a debt settlement company that has A+ rating in BBB and has been recommended at many top reviews sites. A legitimate company will never charge you any upfront fee for the services because the FTC put a ban on this in 2010. Scam companies will charge hefty fees and your payments will never go to the creditors. You also must not forget that you will be charged tax if the amount of debt that is forgiven is higher than $600.
Debt settlement can cause your credit score to drop by at least 65 points or more because you stop making payment to the creditor. After your account is settled, it will be recorded paid by settlement on your creditor report. This will be seen by all your future creditors when you review your loan application. If you are interested in debt settlement, you must first gather as much cash as you can so that you will be able to make payment for the lump sump. The creditor is more likely to agree if your reason for the debt settlement is a financial hardship. It is easier to get a lower settlement amount if you are already significantly behind your payment due to a financial hardship.