Debt is very easy to accumulate, but much harder to eliminate—which helps explain in part why most Americans carry some kind of debt these days. It’s all too simple to get stuck in a cycle of using credit to stay afloat, then worrying about how you’re going to dig yourself out from under that mounting debt.
At some point, you have to say enough is enough and commit to truly addressing what you owe. One solution you’ll hear about for major debt typically exceeding $7,500 or even $10,000 is debt settlement. How does this debt relief strategy work? What are the pros and cons of settling your debts? Here’s more on what the debt settlement process entails from start to finish.
Debt Settlement: The Basics
Debt settlement is an option for people struggling to make payments on their unsecured debt, like growing credit card balances or medical bills—and an alternative to the more drastic action of filing for bankruptcy. This form of debt relief is a viable option for consumers who, even if they budgeted intensely for years, would still find themselves unable to pay off their thousands in debts due to a financial hardship. When lifestyle changes alone aren’t enough, it’s time to explore other courses of debt relief.
The basic goal of settlement is to get creditors to zero out your debts for less than the original amount owed. The key? Negotiating. You see, when creditors fear they’ll get nothing, they are often willing to “play ball” and accept a lesser payment as long as it’s timely.
According to The Simple Dollar, here’s what generally happens after you enroll in a debt settlement program:
- You deposit money regularly to a special account.
- Once your account hits a certain level, your debt settlement company reaches out to creditors on your behalf.
- The negotiation team aims to get creditors to accept a sum lower than what you actually owe.
- If creditors accept, you transfer the agreed-upon amount and are no longer indebted for that balance.
This process generally takes at least 24 to 48 months, though the specifics will depend on the amount of debt you’re carrying, how much you can contribute monthly and how many unsecured debts you’re trying to settle.
Note that creditors don’t have to accept settlement offers. Consumers can maximize their chances of success by doing research and choosing a partner with a record of reaching favorable settlements on behalf of clients. Companies that have been around for well over a decade like Freedom Debt Relief tend to have formed relationships with lenders and debt collectors, which can be an asset when it comes time to settle.
Weeding Out the Debt Settlement Scams
If you decide debt settlement might be for you, the next step is doing your due diligence to avoid scams that sound great on paper but will leave you high and dry.
Avoid debt settlement red flags, like any companies issuing guarantees that they can get you out of debt. Another big tip-off that you may be dealing with a scam is that a company asks you for payment before they perform any service for you. The Federal Trade Commission actually made it illegal for debt settlement organizations to collect fees before settling any debts, so a legitimate partner will avoid this behavior.
Reputable debt settlement programs will offer ample information on the cons as well as the pros—like the fact your credit score may drop if you stop paying creditors for any period of time, or the fact that some lenders may still pursue legal action against consumers.
Debt settlement hinges on negotiation with creditors, requiring consumers to complete a series of steps to fulfill the terms of whatever program they choose. As with any debt relief strategy, there are upsides and downsides to explore. Before enrolling in any program, make sure you understand what’s required of you for best results.