Consumer Debt Settlement

Debt settlement can help your debt problems

Your financial situation is different from anyone else. You should take the time to review this consumer debt settlement options guide to find the best solution for your needs and goals.

What Is Debt Settlement?

Consumer Debt Settlement (or debt adjustment) is the process of resolving delinquent unsecured debt for far less than the amount owed by promising the lender a substantial lump sum as full payment.  Debt settlement comes into play only with your unsecured debt like credit cards, medical bills and personal loans.  This debt relief option will help you only if you have a financial hardship and have little likelihood of repaying your creditors.   Your creditors are not going to negotiate and accept less than what you owe if there’s a belief you are able pay the entire debt originally agreed to.

The consumer debt settlement process will hurt your credit score since you will not be making full payment on your unsecured debt accounts.  However you will already have hurt your credit score by being delinquent on these accounts, even before considering this debt relief option. As long as you are aware of the impact and have a plan to recover afterward, debt settlement can be the right solution for you.  Since this process is truly debt reduction,  It offers a fast exit from your unsecured debt and a clean start moving forward with your life.

Do It Yourself Debt Settlement

There are two things to be negotiated with your creditors: how much you can pay and how it will be reported on your credit reports.

You establish beforehand a total budget, over what period of time, that you can afford for debt settlement. Your goal should be to payoff less than 50% of your total unsecured debts in less than 24 months.

Negotiating reductions in your debt balances with your credit card issuers requires education, experience, discipline, consistency, communication skills and time. Not everyone has them.

Also, the number of delinquent credit card accounts should be a factor before you go down this path.

Some basic things for you to consider:

  • You cannot legally obligate your creditors to negotiate or accept a debt settlement.
  • Creditors will be aggressive in their debt recovery process.
  • Your character will be tested in the debt settlement negotiations.
  • Any third-party company debt settlement with your creditors requires your approval.
  • Once you choose this debt relief option, it must be to finish successfully.

Success in credit card debt settlement is: pay off all your unsecured debts, at the lowest total cost, as fast as possible, with the least amount of damage to your credit profile to move forward in your life.

For Profit Debt Settlement

For-profit consumer debt settlement companies are supported by the user fees charged for their services. These fees are based on a commission of the total amount of unsecured debt to be negotiated or the total amount of unsecured debt reduction. The latter commission structure is better for you. You only pay fees when a debt settlement with one of your creditors is completed. Legally there are no upfront fees with a debt settlement company.

If you are struggling with multiple credit card creditors, for-profit debt settlement is probably the better option. Their experience, resources and relationships with credit card issuers will normally result in faster and higher discounted debt settlements. You need to balance these savings with the additional expense of their service fees.

A third-party debt settlement company generally follows the same process as if you negotiated for yourself:

  • An escrow account is established where you make deposits to generate the funds to be used for creditor lump-sum payoffs.
  • A budget is established for monthly payments to be set aside until there is sufficient funds to make creditor settlement offers.
  • Consider all options to sell personal assets to fund the escrow account to speed up the debt settlement process.
  • When sufficient funds are available your creditors will be approached with settlement offers.
  • When a settlement offer is accepted, you approve the final offer and funds are release for a lump-sum payout.
  • This process is repeated with your other creditors until debt settlement agreements are reached.
  • The shorter the debt settlement process, the less cost and damage to your credit profile.

How Does Debt Settlement Work?

Debt settlement is true debt reduction. This debt relief option is where you or a third-party agency negotiate with your lenders to resolve delinquent debt accounts for far less than the amount owed by promising the lender a substantial lump sum as full payment. Debt settlement comes into play only with your unsecured debt like credit cards, medical bills and personal loans. Your credit card accounts need to be already 3-6 months delinquent and you are in a financial hardship where your creditors have little expectation of receiving any payment on their accounts. The risk of receiving no payment is the motivation for negotiating with you as there is always an implicit threat that you might declare bankruptcy.

Do It Yourself Debt Settlement Option

A variety of questions need to be answered before deciding that a DIY debt settlement is right for you:

  • Do you qualify as a financial hardship case to allow negotiating with your creditors?
  • Are your total unsecured debts less than $10,000? If not, you should consider using a third-party debt settlement company.
  • Are your unsecured debts sufficiently delinquent (3-6 months late)? If not, its premature to start debt settlement.
  • Are any of your unsecured debts reaching their statute of limitations? If so, there may be no need to negotiate a settlement.
  • How will you be funding lump-sum payments to your creditors?
  • Do you have the discipline and skills to negotiate with your creditors and collectors?

Once these are answered, prepare yourself to begin the debt settlement process.

You will only be negotiating unsecured debt like your credit cards, personal loans and medical bills.

Prioritize your debt accounts. This may be based on account balance, APR/penalties or delinquency age.

When you have sufficient funds to make a lump-sum payment offer, you can begin debt negotiations.

Your debt settlement offers should be no more than 30% of the outstanding account balance. This allows you accept a counter offer from the lender if there is interest in negotiation. You have a limited budget of 50% of the total delinquent accounts to negotiate with.

Be consistent in your telephone conversations with your creditors. Don’t deviate. Your conversations will be recorded by your creditors and referenced during any future negotiations. Document each creditor conversation: date, creditor contact, points discussed, action items, etc.

Contact your creditors and advise them of your financial hardship and your inability to make payments on the accounts. It must be made clear to the creditor that if your financial situation does not improve you will be considering bankruptcy.

Once you negotiate a settlement agreement with one of your creditors, you must receive it in writing.

After you have completed your lump sum payment to your creditor, verify and receive confirmation in writing.

Thirty days later, review your credit report to ensure that the creditor account has been marked as “account settled”.

For-Profit Debt Settlement Company

A variety of questions need to be answered before deciding that debt settlement is right for you:

  • Do you qualify as a financial hardship case to allow negotiating with your creditors?
  • Are your total unsecured debts $10,000+ to justify the debt settlement company’s service fees? Otherwise you should consider DIY negotiation.
  • Are your unsecured debts sufficiently delinquent? They need to be 3-6 months late.
  • Are any of your unsecured debts reaching their statute of limitations? If so, there may be no need to negotiate a settlement.
  • How will the debt settlement escrow account be funded? Will it be only your monthly income or combined with other sources?

Once these are answered and paperwork completed, the debt settlement process can begin.

The debt settlement counselor will review with you which delinquent credit cards accounts should be included. Small credit card accounts or those already “charged-off” by the credit card issuer will not be included since there is little benefit to negotiate a settlement.

You will need to budget 50% or less of the total unsecured debt for the payoff escrow account. Debt settlement payoffs offers will be no more than 50% of what you owe on any account in the program.

You make no further attempts to pay any unsecured debt in the debt settlement program and only minimum payments for those accounts that you excluded.

Once there is sufficient funds in the payoff escrow account, your debt settlement counselor begins making settlement offers to your creditors.

When a verbal agreement is reached with one of your creditors, it is documented and passed to you for approval. Once approved, funds are released from the payoff escrow account to the creditor. Funds are then released to the debt settlement company for its service fees.

The process then continues with other creditors.

The faster you can fund the payoff escrow account, the faster you can eliminate your unsecured debts.

Considerations

Lower the payoff amounts you need to cancel your unsecured debts.

Reduce the time you need to cancel your unsecured debts.

Avoid the alternative of your filing personal bankruptcy and loss of personal assets.

Help you deal with a financial hardship in your life.

Prevent the damage to your credit history profile.

Intercede in any collection efforts that are in the legal process.

Stop the closing of non-secured credit accounts for up to seven years.

Deal with the the cause of excess credit card debt which is lack of financial discipline.

Most Americans carry an excessive amount of credit card debt. While convenient as a form of payment, it is an expensive type of debt to use and requires financial discipline. Many lack this.

Debt settlement is true debt reduction but at a significant cost to your credit history profile. Your opportunities for future credit from lenders wlll be limited for up to seven years. Additionally your cost of debt financing from a lender will be relatively high. You will be perceived as a credit risk for an extended period of time.

However, this debt relief option does avoid the alternative of filing personal bankruptcy and the resultant loss of your personal assets and other negatives in your personal life.

Any creditor accounts that you settle for less than the full amount that you owe, you could be subject to income taxes. Any principal (excluding interest and penalties) that is not paid back is consider to be canceled debt. This is treated by the IRS as a source of income and is taxable. To avoid paying taxes on this canceled debt you will need to show to the IRS that this occurred during a period of financial hardship using a 1099-C form.

Yes it does. Debt settlement will trash your credit history profile. It is simple to understand. You were unable to honor your commitments to your creditors.

However, since you were already in a financial hardship situation prior to the debt settlement process, your credit history profile was already damaged due to late creditor payments.

Your creditor settled accounts will be designate as “account settled” rather than “account paid” on your credit report. This is a negative account status. As a result, this will restrict your access to new credit as well as raise interest rates for any future type of financing for up to seven years.

However your credit profile will begin to improve, subject to your consistency of account payments.

Finally you need to avoid the biggest mistake people make after eliminating credit card debt. That is, not stopping making new credit card charges.

Your life goes on.

Credit Repair | Identity Theft

Frequently Asked Questions

Consumer Credit Basics

Convenience – Credit cards are a widely accepted form of payment and relatively safe versus cash or checks.

Leverage – If you are not satisfied with a product purchase using a credit card, you normally have the option of canceling and refusing payment.

Interest free loan – Most credit cards have about a 25 day period where no interest is paid on the balance.

Emergency Spending – Credit cards provide a ready source of credit for unexpected expenses.

Expense Tracking – Your credit card purchase are monthly summarized for your review and budgeting.

A secured credit card means that a security deposit has been set up to guarantee payments using the credit card. The amount of your security deposit is the credit limit for the secured credit card. This type of card is used by those that need to establish a credit history of consistent, on-time account credit payments.

A grace period is the amount of time after a due date of a bill before late fees are applied.

When you default on a loan to fail to make timely payments or follow other terms of the loan. When a borrower fails to make any payments due, it is referred to as a monetary default. When a borrower fails to follow through on any other terms of the debt, it is referred to as a covenant default.

Bankruptcy is the term that describes the legal court process a person must go through to relieve the debts they are unable to pay their creditors.

A late bill payment needs to be 30 days old before it will appear on your credit report. However, even if your late payment does not appear on your credit report, you will likely experience late fees and interest charges.

Late payments (30 days or more after due date), collections and foreclosures will remain on your credit report for seven years. Bankruptcy judgements will remain on your credit report for ten years.

Credit bureaus do no approve loans. Your perspective loan lender can request from the credit bureau your credit report to review as part of the application process. Credit bureaus do not make lending decisions. They collect consumer credit data to produce credit reports.

A lien holder is an institution, like a bank, that has the right to take and hold or sell the property of a debtor as security or payment on a debt or loan borrowed from them.

Debt consolidation is the process of combining multiple debts into one larger debt that can often lower payments and interest rates.

APR stands for Annual Percentage Rate, a term normally used with consumer loans. An APR includes the costs associated with obtaining the loan: interest rate, points, origination fee that you will be paying annually. The APR is used a means of comparison with like loan products.

Consumer Credit is simply the ability for a consumer to be able to borrow money in order to purchase a product or service. Borrowed money can take many forms, such as credit cards for product purchases. a student loan, a personal loan, car loan or home mortgage.

Most likely your credit report has errors.

The Federal Trade Commission reported in a study conducted in 2012 that 26% of the credit reports they analyzed had errors. Of those with errors, 5% who disputed these errors increased their credit scores at least 25 points. That is a significant change in a credit score.

You should not assume that your credit reports are completely accurate.

No. Your credit report is independent of your spouse. The same is true of your credit scores. However…

A lender will likely take into consideration both of your credit reports when deciding on a home mortgage, for example. If your credit report is bad and your spouse’s good you may find that the loan, if approved, has a higher interest rate than if both were good.

It certainly can. Many employers will do a credit check of a potential employee to determine the stability of the job candidate. For job positions that entail financial responsibility, it is most likely you would experience a credit report check.

This means that the issuer of the credit card has verified with a credit bureau that you meet its credit criteria and has pre-approved you as a quality candidate for its product.

However you will still need to apply in order to actually receive a new credit card. You may or may not be accepted once you have formally applied.

This simply means that the credit card issuer will make a quick decision about your application. Generally only those with good to excellent credit will receive rapid approval.

In the US, you need to be 18 years old to get a credit card using your credit history. You however can be listed as an authorized user by your parents.

There is a saying: “Everything in life is negotiable.” That also applies to your credit card interest rate.

If you have been consistently making on-time payments on your credit card for a period of time, it is worth a call to your credit card issuer to see if they can reduce the interest rate. It is a competitive market and it might be worth your card issuer to reduce the APR to not lose your business. If not, you might want to take advantage of an offer from another card issuer, since it is a competitive market.

Also you can consider opening a balance transfer credit card, with a lower interest rate, to move your existing credit card balance to the new card. You need to make sure that the balance transfer card, after the customary promotional period, offer you a competitive APR.

Credit cards offer much more protection against theft and fraud for online purchases. In case of a buyer dispute, the funds have already left your bank account. That is not the case if you use a credit card.

Keep your debit card for local purchases, when it is more convenient than carrying lots of cash. Use your credit card for online electronic payments.

Load More

Consumer Credit Basics

Convenience – Credit cards are a widely accepted form of payment and relatively safe versus cash or checks.

Leverage – If you are not satisfied with a product purchase using a credit card, you normally have the option of canceling and refusing payment.

Interest free loan – Most credit cards have about a 25 day period where no interest is paid on the balance.

Emergency Spending – Credit cards provide a ready source of credit for unexpected expenses.

Expense Tracking – Your credit card purchase are monthly summarized for your review and budgeting.

A secured credit card means that a security deposit has been set up to guarantee payments using the credit card. The amount of your security deposit is the credit limit for the secured credit card. This type of card is used by those that need to establish a credit history of consistent, on-time account credit payments.

A grace period is the amount of time after a due date of a bill before late fees are applied.

When you default on a loan to fail to make timely payments or follow other terms of the loan. When a borrower fails to make any payments due, it is referred to as a monetary default. When a borrower fails to follow through on any other terms of the debt, it is referred to as a covenant default.

Bankruptcy is the term that describes the legal court process a person must go through to relieve the debts they are unable to pay their creditors.

A late bill payment needs to be 30 days old before it will appear on your credit report. However, even if your late payment does not appear on your credit report, you will likely experience late fees and interest charges.

Late payments (30 days or more after due date), collections and foreclosures will remain on your credit report for seven years. Bankruptcy judgements will remain on your credit report for ten years.

Credit bureaus do no approve loans. Your perspective loan lender can request from the credit bureau your credit report to review as part of the application process. Credit bureaus do not make lending decisions. They collect consumer credit data to produce credit reports.

A lien holder is an institution, like a bank, that has the right to take and hold or sell the property of a debtor as security or payment on a debt or loan borrowed from them.

Debt consolidation is the process of combining multiple debts into one larger debt that can often lower payments and interest rates.

APR stands for Annual Percentage Rate, a term normally used with consumer loans. An APR includes the costs associated with obtaining the loan: interest rate, points, origination fee that you will be paying annually. The APR is used a means of comparison with like loan products.

Consumer Credit is simply the ability for a consumer to be able to borrow money in order to purchase a product or service. Borrowed money can take many forms, such as credit cards for product purchases. a student loan, a personal loan, car loan or home mortgage.

Most likely your credit report has errors.

The Federal Trade Commission reported in a study conducted in 2012 that 26% of the credit reports they analyzed had errors. Of those with errors, 5% who disputed these errors increased their credit scores at least 25 points. That is a significant change in a credit score.

You should not assume that your credit reports are completely accurate.

No. Your credit report is independent of your spouse. The same is true of your credit scores. However…

A lender will likely take into consideration both of your credit reports when deciding on a home mortgage, for example. If your credit report is bad and your spouse’s good you may find that the loan, if approved, has a higher interest rate than if both were good.

It certainly can. Many employers will do a credit check of a potential employee to determine the stability of the job candidate. For job positions that entail financial responsibility, it is most likely you would experience a credit report check.

This means that the issuer of the credit card has verified with a credit bureau that you meet its credit criteria and has pre-approved you as a quality candidate for its product.

However you will still need to apply in order to actually receive a new credit card. You may or may not be accepted once you have formally applied.

This simply means that the credit card issuer will make a quick decision about your application. Generally only those with good to excellent credit will receive rapid approval.

In the US, you need to be 18 years old to get a credit card using your credit history. You however can be listed as an authorized user by your parents.

There is a saying: “Everything in life is negotiable.” That also applies to your credit card interest rate.

If you have been consistently making on-time payments on your credit card for a period of time, it is worth a call to your credit card issuer to see if they can reduce the interest rate. It is a competitive market and it might be worth your card issuer to reduce the APR to not lose your business. If not, you might want to take advantage of an offer from another card issuer, since it is a competitive market.

Also you can consider opening a balance transfer credit card, with a lower interest rate, to move your existing credit card balance to the new card. You need to make sure that the balance transfer card, after the customary promotional period, offer you a competitive APR.

Credit cards offer much more protection against theft and fraud for online purchases. In case of a buyer dispute, the funds have already left your bank account. That is not the case if you use a credit card.

Keep your debit card for local purchases, when it is more convenient than carrying lots of cash. Use your credit card for online electronic payments.

Load More

Debt Relief Articles


Improve Your Credit Score
Improve Your Credit Score – Relax, It’s Kool…
You can improve your credit score in a variety of ways that are not difficult.
credit card paymetns
Credit Card Payments – When Will It End?
For many Americans, monthly credit card payments is a constant challenge as they struggle to get out of debt.

This Internet site provides information and reference material to consumers. It is intended to help connect them with providers of products and services that may assist them in their financial needs.