Debt settlement is a service offered by a debt relief company that involves negotiating with your creditors to accept a lump sum payment that is lower than your total accumulated unsecured debt. Only unsecured debt can be negotiated with Debt Settlement. Debt settlement can be accomplished on your own or through a debt relief company. Using a debt relief company experienced in these types of negotiations will usually result in higher debt reduction agreements with your creditors.
The Debt Settlement Process
The first step is to contact a debt relief company for a free consultation. You will need to provide the debt advisor information on your income, expenses, and outstanding debts. The debt advisor will look at all the information and provide you with a suggested debt settlement program that will include the debts to be settled, the estimated debt reduction that could be achieved, the estimated payoff amount for each debt and the estimated time to complete the debt settlement program for all debt accounts.
Once you sign up for the debt settlement program the debt advisor will request that you begin saving the money you would have paid to the creditor so that it can be used to pay off the final settlement amount. Depending on the size of the outstanding debt, the advisor may also counsel you on obtaining additional money to help pay off the debt settlement if needed.
While you are delinquent, the debt advisor will begin negotiating with each creditor to agree to reduce the debt owed. Each debt is negotiated separately with the associated creditor so if you have 3 accounts to settle, each one will be negotiated separately. This allows the debt relief company to provide you debt relief as quickly as possible.
The advisor will negotiate a reduction of debt, usually between 40-60%, with the creditor. The agreement will also include a date that the reduced debt must be paid by, usually in a lump sum payment. For example, you may have a credit card balance of $30,000 which the debt advisor can negotiate down to $12,000 (60% reduction) with a payoff date within 60 days of the settlement agreement date. The lump sum payment is why you must save money during the time you are not paying your debt, so you have the money when it’s needed to settle for less than you owe.
Each debt account will be negotiated separately so it’s not unusual for you to see debt relief within 6 months of starting the program.
The fees paid to the debt relief company vary based on how the company structures their fees. A good debt relief company will not require their fees to be paid until each debt account is successfully settled. Monthly fees and cancellation fees should not be charged and the company should not force you to open an escrow account.
PCS Debt Relief charges fees for each individual debt account after a settlement agreement is reached with the creditor. The fees are based on the amount of debt saved, not on the total amount of debt that you have. Not all debt relief companies work this way so make sure you understand each company’s fee structure.
Benefits of Debt Settlement
There are a number of benefits to resolving your debt through debt settlement with a debt relief company:
- Debt settlement can reduce the debt you owe by a significant amount, usually around 40 – 60% of what you originally owed. This forgiveness of a large part of your debt can allow you a way out from under your mountain of debt.
- Debt settlement is one of the quickest ways to get out from under your debt which allows you to get back on your feet quicker so you can move on with your life. Debt relief can begin as quickly as 6 months.
- Despite having an initial negative impact on your credit score, you will see a good positive increase as each debt is settled and eliminated. Usually within 2 years of your debt settlement process you are able to get non-secured credit again.
Things to Be Aware Of With Debt Settlement
Here are a few things to be aware of if you are considering debt settlement:
Any debt settlement where the forgiven amount (the amount you save) is greater than $600 is taxable. So if you owe $10,000 and settle for $6,000 the $4,000 is taxable. This, however, is only true if you cannot prove you are insolvent. Insolvent means your assets are less than your debts. Most of our clients are able to declare insolvency and therefore do not have to pay taxes on their savings.
Debt settlement will have a negative impact on your credit score initially. However, once you pay off your debt settlements your credit score will rapidly start to improve because your debt-to-income ratio will drastically improve. If you were to continue to struggle with your debt and making payments (versus using debt settlement) you would normally find your credit score continuing to decline without the ability to recover.
A successful debt settlement program requires you to have the money to pay off the debt settlement amount once it’s been negotiated. If you don’t have the money or can’t save enough in time to pay off the settlement then it’s unlikely that you’ll be successful eliminating your debt with the debt settlement process. You should be very open about your financial situation when you talk with a debt advisor so they can determine if debt settlement is right for you.
While in a debt settlement program your debts may incur late fees and penalties which add to your debt. However, a good debt relief company will take this into consideration when they discuss the results you can achieve with debt settlement. The increase due to fees and penalties will also be part of what is negotiated with the creditors.
Debt collectors or creditors may continue to call you trying to collect your payments. No debt relief company can stop all of the calls but a good company can get them reduced.
There is always a possibility that a creditor could sue for non-payment of the debt during a settlement program. Usually this risk increases the longer the debt settlement process takes. A program that takes more than 2 years has a much higher risk of this happening than a program that takes a year or less. PCS Debt Relief focuses on programs that take 2 years or less to complete.
Creditors aren’t required to negotiate with you or the debt relief company to settle your debt. During the debt settlement process it’s possible that a creditor may refuse to settle. If that should happen your debt relief company will work with you to find alternative solutions for that debt account.
Consult a Debt Relief Company
To determine if debt settlement is the right solution for you, contact a debt relief company like PCS Debt Relief. A debt relief advisor can review your situation and provide you with the best debt relief options for your unique financial situation.
PCS Debt Relief is not a law firm, and does not provide legal counseling. If PCS believes bankruptcy may be the best solution for you after analyzing your situation, your debt analyst will refer you to an attorney to receive legal counseling.