Debt Settlement
By Janet Williams |
What is debt settlement?
Debt Settlement is a process to settle
your debts with the creditors. With debt settlement, a third party or you
yourself negotiate with your creditors to come up with a reduced debt that you
agree to pay. The reduction is usually between 30-60% of the total original debt
amount.
Attributes of Debt Settlement:
Debt Settlement
programs gives you a lot of options to clean your debts. It reduces your
principal debt amount, eliminates your late fees, lowers your APR, and provides
you the flexibility to repay your debts within your chosen time span.
Principal debt amount: Most debt settlement firms negotiate with your
creditors and reduce the principal debt amount you owe. For example, in maximum
cases 40-60% of the original debt amount is reduced.
Late fee charges: Some debt settlement firms waive off your entire
late fee charges. It is sometimes seen that late fee charges club to form a
major portion of your debt amount. Thus elimination of late fees can save
hundred of dollars.
APR: Some debt settlement programs are done to reduce the high APR's
for a particular account. For example, some debt settlement company may notify
that APR has been reduced to 8% for the proposals accepted after 10th September
2004 and reduced to 0% for all proposals accepted before 10th September
2004.
Monthly installments: Debt settlement programs are also determined on
the amount you pay on monthly installments. In this process you have to pay a
single monthly amount to a debt settlement firm in order to settle your debts.
The more you can pay the lesser period of time you take to settle your debt. The
amount of your monthly installment is fixed by the debt settlement company based
on your present financial status.
Annual time frame: Debt settlement is also chalked out on the basis
of extended time periods. In such cases you have the provision to extend your
time period from 2 years to 4 years or sometimes even longer. This is helpful
for people who cannot afford to pay at one go.
How long does a debt
settlement process take?
A normal credit card debt settlement case
might take 3-9 months. If someone wanted to speed up the progress it could be
shortened to 1-3 months. Someone wishing to stretch things out could find the
time extended to 12-18 months. Some special debt management and debt reduction
firms can even lengthen the process to 4 years or more.
How much do
these firms usually charge?
Most debt settlement companies are
transparent about their fee structure but you are advised to check out if there
are any hidden fees involved in the settlement process. On an average the charge
of debt reduction firms range from 8%-15% of the total outstanding
debt.
The advantages of debt settlement:
Debt Settlement is one of the quickest and best ways to improve your Credit
Report.
Avoid being harassed by the abusive creditors.
Many collection agencies will settle a debt between 40%-60% of the original
debt amount. In this process you can save thousands of dollars. You will only
have to make a single payment every month.
With debt settlement your time will be saved and your debts will be
eliminated within 2 to 4 years. It is also less likely that you will have to
fight the creditor later to actually delete the negative listing.
The
disadvantages of debt settlement:
Your credit will be affected in a negative manner. This will be reflected on
your credit report for the next 7-10 years. However, despite this fact consumers
still opt for debt settlement and avoid bankruptcy.
There is a probability that creditors will continue to harass you throughout
the process of negotiations and may even sue you or garnish your wage. However,
only one creditor may garnish you at a time, and in some states, you may not be
garnished at all. ¢ Some debt settlement companies will only accept you, if you
have $10,000 or more in credit.
7 attorney tips for debt
settlement:
Be honest but represent your financial position to be unfavorable.
If considering bankruptcy, say so. But do not incur any other debt after
saying so.
Never disclose where you work or bank.
Don't hire a lawyer if you are not sure that you are in good standing when
compared to your creditor.
If you are contacted more than one creditor for the same debt, be sure that
your account is sold off to a second creditor. This indicates that you have
avoided the first creditor really well.
If the creditor agrees to settle for full then make sure that your account
status also shows "satisfied in full".
There are high chances that you may have income tax on the debt owed after
settlement. The creditor might send you a 1099-C at the end of the financial
year. You are then required to report the amount listed in the 1099-C as
income.
About the Author
Janet Williams is a contributing writer to http://www.debtconsolidationcare.com/ and is currently working on a special section in the site called do it
yourself where you can eliminate your debts and become debt free.
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