The following is a guest post from Tricia Wagner a writer at Destroy Debt
Debt Settlement: Things You Need To Know Before Enrolling
Recently I read that Americans' debt is shrinking for the first time ever. This is partially due to the fact that lenders are upping the requirements for people to acquire and use credit. This is good for people for the following reasons. First people are forced to take a hard look at how they are spending their money and rein in their spending during these difficult economic times. Second, people who are in denial about their debt are forced to face the reality of their financial situation and develop a plan to eradicate it once and for all. There are several methods to eliminate debt including debt settlement which is gaining in popularity.
Understanding debt settlement.
Debt settlement is a process in which a company negotiates with a credit card company to settle your account for a lump sum amount less than what you owe. This is a useful way to reduce the amount you have to pay by up to 50%, however in order for the credit card company to “deal” you have to be delinquent with your accounts which of course has a negative affect on your credit. If you have a significant amount ($10,000 or higher) of credit card debt and find you are unable to make the minimum payments, debt settlement may be an option to avoid filing for bankruptcy. Conversely if you have any reasonable way to continue repayment on your credit card accounts you would likely want to consider a process less damaging to your credit.
What is the ideal length of the program?
Before you sign on with a company to represent you in this process you should find out the length of time it will take to settle the debts. It is not advisable to be in a debt settlement program that is longer than 3 years. Remember in order to make a lump sum settlement payment you are putting money aside versus paying your credit card payments. While you are not paying, the credit card companies are pursuing you either themselves or through a debt collector. Since going to court can get costly in most cases the creditors will prefer to settle the accounts, however if they feel they have exhausted all methods of debt collection they do have the right to sue you for unpaid debt. Therefore the shorter the program the better.
Factors that may affect negotiating a successful settlement.
Negotiating a settlement can get tricky, here are a few things that may affect the likelihood of your creditors settling.
• Proving a financial hardship will go a long way toward a successful settlement. If you can prove you were unable to make your payments due to loss of employment, medical issues or some other hardship you will make out better than someone who simply didn't manage their credit wisely.
• Your recent account activity will play a role in whether or not your creditor wants to settle. If you recently made a very large purchase and then stop paying on your account, it may appear that you never intended to pay in the first place.
• If you have filed Chapter 7 bankruptcy in the past 7 years a creditor may be less likely to settle. After all settlement is generally the last stop before bankruptcy and if you are unable to file....they may decide settling is not in their best interest.
Personally I am neither for nor against debt settlement. It seems to be a legitimate way for a person experiencing a financial hardship to avoid filing bankruptcy while repaying a portion of their debt. On the other hand there are a lot of “ifs” involved and it would seem that if a settlement is handled poorly you may find yourself owing more in the end. I think anyone considering this option should be diligent in researching the company they intend to work with and make sure there is no other way to reduce your debt before proceeding.
Trisha Wagner is a freelance writer for DestroyDebt.com, a debt community featuring debt forums. Trisha writes regularly on the topics of getting out of debt and personal finance.