Most people in the U.S. choose debt consolidation when they cannot repay the amount owed. Rather than the debt getting moving around, it gets reduced. You aren't any longer obligated to pay the full amount to your creditor.
You can avoid bankruptcy with debt relief programs. But there is one consideration you should think about - your credit score may get affected. Besides, you have to pay some fees to the debt settlement company. Let us see how much debt relief is going to cost and how it works.
How Debt Relief or Settlement Works to Reduce Your Debt
First, you start by stopping your monthly payments to the lender. Instead, your money goes into an escrow-type account. Once the sufficient amount gets collected, the debt relief company contacts your lender and begins negotiations. The agency can help you save around 60 cents per dollar.
If you owe $10,000 on a credit card, you can repay only half of it. With the right debt relief company, you can get the lending company to erase part of this. You have to make a one-time payment for the amount you can pay.
How Much Will It Cost?
The cost of settlement varies with each debt relief firm. The debt relief firm will charge you a service fee, usually, percentage of the settlement. For instance, the amount owed is $20,000, and the company charges are 20%.
You can cut your debt anywhere between 50-70% of your outstanding balance. Say, you save $10,000, and you pay 20% of your value to the agency. And over that, you may have to pay the Internal Revenue Service (IRS) around 25%. Still, you save a lot of money compared to what you had to repay before the settlement.
However, the Federal Trade Commission (FTC) enacts the advance fee ban. You don’t pay the service fees of the debt relief agency until after the settlement. So, this gives you ample time from the time you hire them.
When Is Debt Settlement a Good Idea for Saving Money?
You want to go debt-free in a short time: Debt negotiation and consolidation may lower your debt by extending your repayment time. However, you still have to repay the amount in full. With debt relief, you will be free of part of the amount owed.
You want a cheap way to get rid of your debt: In almost 96% of cases, debt reduction is higher than the service charges and other related fees. Per the American Fair Credit Council (AFCC), debt relief programs save $2.64 for every $1 of fees.
You want to avoid bankruptcy: Although filing for personal bankruptcy is a quick process, it severely affects your credit score. The debt remains on the public record for almost ten years, and you also lose your assets.
Why Would the Creditor Accept a Settlement?
Your eventual inability to pay the outstanding balance makes them fear you may spiral toward bankruptcy. So, your lender will willingly forgo a substantial portion of the debt to protect their finances. A good negotiator knows how to use this to your advantage.
Usually, debt relief agencies begin by offering 30% of the amount owed. Since there is no collateral for unsecured loans, your lender may accept a settlement with a lump-sum paid.
Whether you are strapped for cash or unable to repay the entire balance, choose a debt relief program. Contact a debt settlement manager to help you understand your options.