If you’re overwhelmed with your unsecured debts and don’t know how to come out of it, you can opt for debt settlement program. This program is also known as debt negotiation.
Debt settlement program
This program helps to reduce your outstanding debt balance by 50-60%. The settlement company negotiates with your creditors to reduce your outstanding debt amount. You have to make a fixed monthly payment into an account, which is usually a trust account, until the account accumulates a sufficient fund to settle your debt. Each of your debt, from the largest to smallest, is settled one by one, until you are left with no debt. You can settle both your secured and unsecured debts with the help of this program.
Secured and unsecured debts
A secured debt is that, where the lender can keep your property or car as collateral and in case you are a defaulter, the lender can take possession of the collateral.
An unsecured debt is that, where nothing is kept as collateral. This debt is given to people with very good credit report. The unsecured debts are credit cards, medical bills, student loans, personal loans, department store cards, bounced checks, etc.
How the program works
You can either negotiate with your creditors to do settlement or you can take help of a debt settlement company to negotiate on your behalf, with your creditors. The company negotiates with your creditors to reduce your outstanding debt amount by 40-60%. For this, you need to make a fixed amount of monthly payment to a trust or an account created for this purpose. Once your monthly payments accumulate into a lump sum amount, your creditors are paid from that. The settlement company takes a charge for their service. You also need to pay tax on the forgiven portion of your debt to the IRS.
Pros and cons of the program
The benefits of this program are:
- Reduced debt amount: Once you negotiate for settlement, your outstanding debt balance is reduced by 40-60%, thus, you need to pay much less amount than the one you actually owe.
- Single payment: Instead of making multiple payments to your creditors, you have to make a single payment only to your settlement company.
- Pay off debt faster: You may get out of debts in a much less time if you go for debt settlement. Depending on the amount of debt, your debts may get resolved in months instead of years and it will free up your cash flow more quickly.
- Avoid bankruptcy: If you’re on the verge of declaring yourself bankrupt, debt settlement can be a very good alternative.
- No need of an attorney: You don’t need to take help of an attorney for settlement program. If you know the process of settlement, you can do it on your own.
However, the downsides of this program are:
- Your credit score will be lowered: Once you opt for debt settlement, you stop making payment to your creditors. This will affect your credit score and it will get lowered.
- You will receive calls from creditors: The moment you stop paying to your creditors, you will start getting harassing calls from your creditors.
- You have to pay taxes: You have to pay taxes on the forgiven portion of your debt amount.
You can get out of unpaid bills through debt settlement programs. However, you need to weigh the pros and cons of the program and make your decision.