Debt Settlement: Is it Worth it & How Does it Work
Debt settlement is a good idea for people who want to get out of debt fast by paying a fraction of the outstanding balance on their credit cards, payday loans, and medical bills.
It is an agreement where the creditor or debt collector forgives a portion of the debt due to the debtor's financial hardship.
Table of Contents
- Debt Settlement: Is it Worth it & How Does it Work
- What is a Debt Settlement Program?
- Is it Worth it to Settle a Debt?
- When is Debt Settlement a Good Idea?
- Benefits of Working with OVLG
- What Other Services Does My Team Offer?
- How Does Our Debt Settlement Process Work?
- Types of Debts Eligible for Settlement
- For How Much Will Debt Collectors Settle?
- DIY Debt Settlement - Is The Route Right For You?
- Hiring a Debt Settlement Company & Working With an Attorney
- What are The Key Debt Settlement Laws You Should Remember?
- 5 Red Flags of Debt Settlement Scams
- Important Debt Settlement Questions Answered
- Alternatives to Debt Settlement
- Debt settlement frequently asked questions
What is a Debt Settlement Program?
A debt settlement program (also known as a debt settlement plan or debt resolution program) is a legal bill repayment method that helps consumers and creditors avoid bankruptcy.
In this program, a law firm or a debt settlement company negotiates with creditors on behalf of consumers to reduce their payoff amount, late fees, and fines.
Once a creditor agrees to accept less than the total debt amount as full payment, a debt settlement agreement is signed by both parties. The consumers then make a lump sum payment by a specific date and get rid of their debt.Back To Index
Is it Worth it to Settle a Debt?
Your financial standing and your goals decide whether debt settlement is worth it. So, it's up to you. But we can help you in making your decision.
In this article, we will paint a complete picture of this debt relief option so you can decide whether debt settlement is worth it for you.
Let's start with the pros and cons:
- Save a lot of money.
- Avoid collection calls and bankruptcy.
- Late fees and penalties get dropped.
- Get out of credit card debt within three years.
- Repay debts through affordable single monthly payments.
- Your credit score will drop at first.
- When you save more than $600, you'll have to pay tax on the savings.
- You have to abide by the debt settlement agreement.
When is Debt Settlement a Good Idea?
Like every other debt relief service, debt settlement is worth it only if you fulfill a specific set of criteria.
These include -
- You have a DTI higher than 50%
- You have a high amount of unsecured debt unpaid.
- You're frequently late on debt payments.
- You have trouble making the minimum payments every month.
If your situation is worse or better than the above points, you're better off with other options like bankruptcy, debt consolidation, or debt management.Back To Index
Benefits of Working with OVLG
I have helped people like you:
- Reduce total debt amount
- Eliminate late fees, advance fees, extra fees
- Avoid debt collection calls.
- Avoid debt-collection lawsuits.
What Other Services Does My Team Offer?
- Debt consolidation
- Debt management
- Relief from collection abuse
- Consumer bankruptcy
- Payday loan consolidation
- Credit card settlement
- Payday loan settlement
How Does Our Debt Settlement Process Work?
Here's an overview of what happens during debt settlement:
- My assistant will take down the details of all your unsecured debts.
- Then, we will review your financial situation and suggest the best debt relief service. If debt settlement suits your needs, we will go ahead with the plan and contact your creditors. I will inform them that they cannot harass you anymore.
- If you get into an agreement with us, we will set up an escrow account where you'll deposit the fund, around which we will negotiate. We will tell you how much to deposit. To help you save and build your negotiation fund, we will also assist you in making a budget. You will be the account's owner, and it'll be insured by the Federal Deposit Insurance Corporation (FDIC).
- Once your account grows to the necessary amount, we will use that money to bargain with your creditors. In this debt settlement negotiation process, you will have the final say on the settlement terms and how we will use your money to pay off the negotiated amount. Once they know I am representing you; most creditors will settle your debt at very favorable terms.
Note: We believe in transparency. So, check out our transparency disclosure if you have any questions specific to our debt settlement program, like our fees, the time it takes to settle, success stories, etc.Back To Index
Types of Debts Eligible for Settlement
Credit Cards and Medical Bills
Delinquent credit cards and medical bills are ideal targets for debt settlement. If you are on the brink of insolvency and file for bankruptcy, the credit card company or medical facility could end up with nothing. Thus, they are likely to settle for a lesser payment.
Typically, federal student loans are highly resistant to debt settlement.
You need to try options like rehabilitation, income-driven repayment plans, deferment, or forbearance first. If you redefault even after leveraging these options and haven't paid your loan in almost a year, you can then go for debt settlement.
Private student loans are easier to get settled than federal student loans.Back To Index
For How Much Will Debt Collectors Settle?
With a well-crafted debt settlement program, you can save a significant amount by reducing your outstanding balance and avoiding penalties and late debt fees.
If your accounts are more than 180 days past due, collection agencies may agree to cut down the outstanding balance by a big percentage since they are not getting money, anyway.
To get an idea, you can see our past debt settlement results here.Back To Index
DIY Debt Settlement - Is The Route Right For You?
You can settle the debt by negotiating with your creditors on your own and getting rid of debts by making a lump sum payment while saving on agency fees. This is referred to as a DIY debt settlement option.
Settling with debt collectors is difficult - you must be smart, determined, and knowledgeable to deal with them effectively.
Specifically, that means you have to:
- Understand the Fair Debt Collections Practices Act (FDCPA) first. This is a consumer protection amendment to the Consumer Credit Protection Act.
- Check if the statute of limitations has expired. Collection agencies can't sue you for the debts after a certain period (depending on your state and the kind of debt you owe). If the statute of limitations has expired, you may not need to pay them a dime.
- Ask the debt collection agency to send you a debt validation letter via certified mail. The letter will lay out the terms of the loan, how much you owe, and the basis of their claim to the debt. If they don't legally own the debt they're asking you to pay; you don't have an obligation to pay them at all.
Bottom line: there are many aspects to consider when it comes to successfully negotiating a debt settlement.
So, you should only go the DIY route if you're confident in getting the job done. If not, it's best to take the help of a debt settlement attorney at a debt relief company.Back To Index
Hiring a Debt Settlement Company & Working With an Attorney
How Can a Debt Settlement Attorney Help You?
A good debt settlement attorney has years of experience settling debt.
They have the training, knowledge, and expertise to understand the ins and outs of debt settlement negotiation. A skilled attorney can apply that knowledge and experience to your specific situation.
Here are some ways a debt settlement lawyer can be of help:
- You won't have to deal with collection calls. The collectors will be required to work with your attorney.
- Attorneys know what creditors can and can't do. They know how to negotiate with creditors to settle your debt in the most challenging situations.
- They know the latest FTC rules by heart, including some you might not know even exist.
- Attorneys are trained negotiators. They are likely to help you save more than you can save yourself.
- They know how to negotiate a debt settlement with credit card companies even if they file a lawsuit against you.
- They can safeguard you from collection harassment and online debt settlement scams.
- If collection agencies try to scam you, an attorney can file a complaint with the state attorney general.
How to Choose the Best Debt Settlement Company?
- Ask the company how they go about settling debt. A good one will know how it works in detail.
- Ask if they charge an upfront fee. Debt settlement companies aren't allowed to charge upfront fees.
- Check if the company is licensed in your state.
- Find out the company's experience in the industry. The longer it has been in the industry, the better.
- Check the fee structure and find out if it is acceptable.
- Go through the company's reviews on the Better Business Bureau website.
- Check to see if the debt settlement company follows the FTCs regulations.
What are The Key Debt Settlement Laws You Should Remember?
You should become familiar with the relevant laws when looking for debt settlement companies to make the right choice.
Here are the important ones that you should remember:
Upfront fees: Debt settlement companies cannot charge you an upfront fee. They can charge you a fee only after they have settled the debt and given you proof that they made the payment to the creditor.
Disclosure: The debt settlement company is required to explain the entire program upfront. They need to inform you when you can expect the debt resolution process to be complete. In addition, they are required to disclose the following facts to you:
- The total cost of maintaining the dedicated account and the program.
- The effect the debt resolution activity is likely to have on your credit score.
Misrepresentation: The Federal Trade Commission prohibits the misrepresentation of facts regarding debt settlement services. Debt settlement companies and their representatives may not make false promises and must clearly explain their services. They are required to reveal their success rate correctly.
Dedicated account: According to laws, a debt settlement company needs to meet the following conditions when setting up the dedicated account:
- They must open an FDIC-insured bank account dedicated to holding their funds.
- They must provide you with complete ownership of the account.
- You must be able to withdraw money from the account anytime without penalty.
- They can't have a referral fee agreement with the bank maintaining the dedicated account.
5 Red Flags of Debt Settlement Scams
While many debt settlement companies look out for your best interest, there are some bad apples that you should beware of.
Till now, according to the FTC website, fifteen cases of debt relief scams have been settled. These fraudsters bilked millions of dollars from thousands of customers through lies and deception.
Remember these five red flags to differentiate a scammer from credible debt settlement companies:
Robocalls - If you receive a recorded message from a company claiming to wipe out most or all of your debt, it's better to avoid following through on the opportunity.
Upfront Fees - Charging upfront fees is illegal, according to the FTC. If a company says it will start negotiating with your creditors only after you pay fees, it's better to stay away.
Fishy Contact Information - If a debt settlement company doesn't have a legitimate address or phone number, the company is bad news.
No Agreement - Don't believe an agent who tells you over the phone that they can settle debts for pennies on the dollar or makes other over-the-top claims but refrain from signing an agreement. A credible company would put all the terms and fees into a binding, written contract.
No Transparency - When a debt settlement company directs you to stop communication with your creditors but avoid addressing possible consequences like collection actions or damage to your credit score, it's likely a scam. Before you hire them, a debt settlement company must tell you about any negative consequences you could face if you stop paying your creditors.
Important Debt Settlement Questions Answered
What's the Effect of Debt Settlement on Credit Scores?
Your credit score will likely drop by a few points after debt settlement.
The drop will be marginal because your credit score will likely be low already due to delinquent accounts and negative items on your credit report.
But, in your financial situation, the trade-off will be worth it because you'll be able to solve your overwhelming debt problems. After you become debt-free, you can start managing your finances efficiently, adding positive items to your credit report and improving your credit score with time.
Are there any Tax Consequences of Debt Settlement?
When you do a debt settlement, if your creditor forgives more than $600, they are required to report that amount to the IRS. The IRS sees the amount saved after debt settlement as taxable income.
So, if you settle your debts this year, you will likely owe money to the IRS the following year when you file your tax return.
But, there are some exemptions for which, if you qualify, you can avoid paying taxes. You can check out these exemptions here.
Will Debt Settlement Stop Creditor Calls?
Yes. When you sign up for our program, we represent you. So, if you want, you can ask your creditor or debt collector to communicate with us instead of calling you directly.
But that doesn't mean you'll be left behind in the conversations. We will keep you in the loop, and you will always have the final say in the negotiation.
Can Debt Settlement Cause a Lawsuit?
The chances of that happening is highly unlikely because most creditors would work things out mutually instead of spending more money taking you to court (with no guarantee of being able to collect on a judgment).
Can Creditors Garnish my Wages During Debt Settlement?
Not unless your creditor brings a lawsuit and obtains a judgment in favor of garnishment. Your creditor should also provide you with a notice of such court action through formal documentation.
So, if a collector threatens you with garnishment without formal notice, consider it a cheap tactic to make you pay. Don't fall for it.
What if a Creditor Doesn't Want to Negotiate?
Although rare, a creditor may not want to negotiate with a debt settlement company.
Suppose that happens, and you absolutely cannot pay off the original outstanding debt. In that case, it's best to wait for the next phase of the collection process, when the major creditors sell their accounts to debt purchasers to get what they can for the delinquent account.
Since the debt purchasers acquire these accounts for pennies on the dollar, there's a high chance they will accept a reasonable settlement offer, which still represents a profit on their purchase.
How Long Does a Debt Settlement Plan Last?
The time it takes can vary on several factors. These include:
- Your financial hardship.
- The age and balance of the accounts you owe your creditors.
- The funds you have available to pay for a settlement.
- The willingness of individual creditors to enter into negotiations.
While there's no guarantee, generally, the quicker you save money, the sooner you'll be able to reach your goals.
Typically, debt settlement programs can take months to complete.Back To Index
Alternatives to Debt Settlement
This option involves taking out a new debt consolidation loan in the amount of all the old unsecured debts or using a balance transfer card to pay off the old accounts.
The strategy is one of the best ways to deal with debt if you can't afford to pay off high-interest credit cards, personal loans, payday loans, medical bills, etc.
Debt management is a strategy to get your unsecured debt under control by making a budget and figuring out how to spend your money best. Under this program, we help you get into a personalized budget plan and stop collection calls.
Bankruptcy allows you to start over by eliminating debts you can't pay. It also allows creditors to get some of their money back based on your saleable assets.
When the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed in 2005, bankruptcy filing became complicated. Hence, a minor mistake during the filing process, or a simple violation of the bankruptcy laws, can delay your bankruptcy.
So, it's best to work with an experienced lawyer.Back To Index
Debt settlement frequently asked questions
A: While all debt actions can impact credit scores, negotiating an account status as "paid in full" with your creditors can minimize adverse effects.
The effect of a debt settlement may be minimal if you are settling modest accounts, mainly if you are current on other, larger loans.
A: Only private student loans can be settled.
A: Fees vary, but debt settlement companies generally charge between 15% and 40% of the settled debt.
I'm thankful to Oakview law group for making me debt-free. Thank you so much for guiding me through the process.See More ...