How to settle your debts
Debt settlement, also called debt relief, usually involves hiring a company that will negotiate with your creditors on your behalf. [ Photo / moneysense.ca ]

Managing Debt: Until you learned about debt settlement, you had zero idea what you were going to do to relieve yourself of all that debt. While you’re eager to get going, you’re a little unsure about the process. Here’s what to expect when you settle debts.

What is Debt Settlement?

It’s essentially a strategy that lets you make a one-time payment in full of less than what you owe to resolve your debt. Most companies work with unsecured debt such as credit cards, medical bills, and personal loans.

How Does Debt Settlement Work?

Debt settlement, also called debt relief, usually involves hiring a company that will negotiate with your creditors on your behalf. Such creditors – typically credit card issuers – are motivated to “settle” since they realize they get nothing should you file bankruptcy.

Before negotiations ensue in earnest, the company will ask you to deposit funds monthly into an escrow-like account. Instead of paying creditors directly, you’ll ultimately pay them from that account when they settle.

By law, debt relief companies are not allowed to charge you until they’ve settled an account. Each creditor is dealt with individually. The whole process can take two to five years although some individual debts are settled in just a few months.

What are the Risks of Debt Relief?

  • Your creditors may not settle. As we say, creditors usually do, but they aren’t obliged to.
  • You may get hit with taxes. The portion of any debt forgiven could be deemed taxable income by the Internal Revenue Service.
  • You’ll have fees before your whole debt is settled. If you have a handful of outstanding balances and the company settles the first one in six months, that will trigger fees even though your whole debt isn’t settled.
  • The process of debt relief does temporarily hurt your credit, which is likely damaged anyway. But once you clear your debts and your payment history improves, your credit scores will rise.

What are the Benefits of Debt Relief?

  • You could lower your debt amount. This is the raison d’etre for debt relief. All you want to do is get out from under that worrisome debt load. If you’re looking for a company that can help you do just that, check out Freedom Debt Relief reviews.
  • It could help you avoid bankruptcy. Bankruptcy can bring your credit score down by between 200 and 250 points. What’s more, the negative info stays on your credit report for seven to 10 years, depending on the type of bankruptcy you file. That will make it difficult for you to qualify for new loans and credit for some time.
  • Get creditors and collectors off you. Once your debt relief company has successfully resolved your debts, and you’ve gotten your spending under control, you can kiss those annoying calls and letters goodbye.

Now That I’ve Settled on Debt Relief, What Should I Do Now?

Do your homework. Unfortunately, the industry has its share of riffraff, so you want a reputable, accredited company to help you. To be safe, contact your state attorney general and local consumer protection agency to see whether any complaints have been filed. Also ask the AG’s office whether the company you’re interested in is required to be licensed, and if so, whether it is.

Now you know a bit more about what to expect when you settle debts. The main thing is to pick a legitimate, credible debt relief company that has years of debt-settling experience. The other important thing is to simply get started on your credit card debt today.

Haven’t you waited long enough?

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