Many people come to a point where they can no longer handle the massive amounts of debt they have accumulated. Unpaid student loans, credit card debts, and unpaid utility bills may have unknowingly crept up to them while still increasing their income streams. When this happens to you, you can settle most of your debt through Debt Settlement.
What is Debt Settlement?
Debt settlement is a negotiation with your creditors to accept payments for a specific percentage of the total amount you owe them while clearing you for the entire debt amount. Your debt with a creditor will be canceled for good as you pay an agreed percentage of the total debt.
What Benefits Can You Get from Debt Settlement?
Get Relief from Being Overburdened with Debts
When creditors agree to a debt settlement, your accounts with them will be cleared even if you only pay for a percentage and not the entire debt amount. However, paying only a fraction of your total debt should not be your primary goal in debt settlement. A Debt Settlement should only be entered as a means of getting relief when your debts have already overwhelmed you, and you need a breather until you get your finances in order.
To Avoid Bankruptcy
Although entering into a debt settlement will negatively affect your credit score, it is still way better than what a bankruptcy will do. When you file for bankruptcy, you are declaring that you are no longer financially capable of settling existing debts. A filed bankruptcy will scar your credit score for ten years, and many creditors or banks may avoid transacting any business with you even after that time. On the other hand, a debt settlement will only stay in your credit report for a short period.
Have Lesser Time in Clearing All Debts
If your main goal is to clear all your debts, you may achieve this goal quicker by arranging debt settlements with your creditors. With a good debt settlement program, you can erase all your debts within two to four years as compared to paying your debts with the standard interest rates.
Why Would Creditors Agree to Debt Settlement?
Debt settlement may give you some benefits. However, your creditors may also benefit from giving debt settlement agreements with clients who have fallen way behind on payments.
Most creditors that agree to debt settlement are those who give out unsecured loans to their customers. An unsecured loan means that a customer will borrow money from a creditor without handing over collateral. Some creditors may see more value in accepting a lump sum payment of a percentage of the total debt as compared to continually hounding the debtors to pay the whole amount.
What are the Drawbacks in Debt Settlement?
However, there may be some drawbacks to debt settlement. One of the steps to enter into a debt settlement is to stop paying your creditors on purpose with the hopes that they will refer your debts to a collection agency. However, creditors are not guaranteed to agree with any debt settlement that you may offer them. If this happens, your debt with them has grown because of the late fees and compounded interest rates.
Debt settlement may sound like the best option for you to eliminate all outstanding financial obligations quickly; however, it can negatively affect your credit score.