Debt settlement, debt consolidation, debt relief...which is right for you?
Being in debt can feel completely overwhelming. It can feel like you are carrying a weight on your shoulders always there with you, with no escape. It can cause you to question your decisions, feel like you have been a failure when it comes to money and can result in endless counterproductive internal monologues that get you absolutely nowhere (except feeling even worse).
If you find yourself in this place of being overwhelmed by your debt, you may have considered looking into debt consolidation or debt settlement/negotiation. In this article, I will give you some tips for what to look for and questions to ask that may help you find a reputable company to help you make your decision.
Click the link below to schedule for a free 15 minute debt settlement mini-session with expert financial coach, Jill Emanuel, to learn which type of debt relief is right for you:
What is debt consolidation?
Debt consolidation is simply taking the total of all of your balances and combining them together (usually into a loan), where you will be able to get locked into a lower interest rate and have one consistent payment for the duration of the debt repayment.
This can be helpful if you have been able to make your payments, but aren’t making the progress you want because of the high interest rates on your credit cards. You can likely decrease a high interest debt (25%+) into something more manageable. Usually, you can expect to find a rate locked in under 15% with this option.
If however, you have been truly struggling to keep up with your minimum payments and feel there is no light at the end of the tunnel, you may wish to pursue more drastic measures, which could include debt settlement/negotiation.
What is debt settlement?
A debt settlement/negotiation is when there is an arrangement reached with the creditor to settle a debt for less than the total amount owed. There are numerous companies that will advertise debt relief and it’s important you know what questions to ask so you can ensure the company you are working with is a reputable one.
What questions should you ask when you are researching debt relief assistance:
1) Be sure to ask the debt relief company what their fee structure is.
Some will have a flat fee, while others will base their fee upon a certain percentage of the total original debt amount. A fee of 12-15% should be considered normal. If someone says their fee is 15-25%, keep on looking.
2) Ensure you will receive a written copy of each settlement offer from your creditor.
You will want the official documentation for each debt settled for your records and be sure to save this for a lifetime!
3) Find out how long the settlement process will take.
Beware of anyone who boasts the settlement will only take a few months as this is highly unlikely. Most settlements can be reached within 24-48 months, but occasionally it can take longer.
4) Ask what their typical settlement rate is.
Most reliable settlement companies will have a good pulse on what their "normal" settlement rate is with the various credit card companies, for instance maybe they can “normally” settle for around 40% of the total balance with Visa, but only 60% with Discover. They should be able to tell you this. Anyone who says they can settle for 30% across the board is not being honest.
5) Find out what you can you expect from them for communication.
Will you have a regular contact person to speak with? How often can you expect to receive a progress update? etc. You want to know what to expect from the beginning, because the process can be lengthy and you will likely want at least quarterly updates on any progress.
6) Ask what their process is for reconciling the difference between what you have paid in and what your debts have been settled for.
It is possible you could have paid in a certain amount, but that your debt could be settled for an amount less than what you have paid in. How do they handle it if that happens?
7) How will the funds you pay in be handled?
It is most typical that the funds will be held in a trust by a third party and you will have access to the funds and any interest that is accrued. Ensure that you have access to any of the funds paid in. Find out if you will receive regular statements. You will want to be able to see what is happening with the money you are paying in.
If you find a company who seems reputable, there are still a few things to be aware of if you choose to pursue debt settlement/negotiation.
First, you need to be aware that a debt settlement will nearly guarantee a decrease in your credit score. A debt settlement will appear as a derogatory mark on your credit report and can remain there for up to seven years. Any missed payments during the time you were waiting for your settlement to be reached could also be reported to the credit bureaus and have a negative impact on your score. With some positive credit behavior, it is possible to begin to reestablish your credit score within the first two years, but you need to be aware that there will undoubtedly be immediate deleterious effects.
Next, you need to be aware that even though the debt relief company will most likely be able to negotiate a settlement, there is no guarantee. Your creditor is not obligated to make a settlement. It is possible that your creditor could sue you for repayment and if they win they would be able to garnish your wages. This is not the most common end result, but you need to be aware of the risk before entering into the settlement process.
Lastly, you want to know that many people never make it thru the entire settlement process. Being locked into the monthly payment to the debt relief company can be hard to stick to for the long term without a solid financial plan in place. A high percentage of people “drop out” before a settlement is ever reached. This is why we encourage clients to begin working with us as soon as possible. It is critical that you ensure you have a clear plan to follow that will support you in your debt settlement process and prepare you for a strong financial future.