Debt settlement is the process of closing debt accounts by coming to an agreement with creditors. When creditors want debtors to continue making payments and are willing to change the terms of the debt or number of payments, it is known as a debt restructuring, which can often save debtor credit ratings. Debt settlement, however, is the process of paying back a portion of the debt in return for forgiveness of the rest of the debt and the end of the liability. If you are interested in debt settlement, you should first consider several important steps.
Examine Financial Records
Begin the settlement process by ordering a credit report from Experian or one of the other major credit companies and look at the records. This credit report details how much debt you owe to various creditors or collection agencies. Sometimes creditors make mistakes on how much debt is owed and when it is owed. Examine the report to make sure there are no errors.
Check the Status of the Debt
The status of the debt refers to how long the debt has lasted. Almost all debts have a status of limitations. After this period is up, creditors cannot legally require debtors to pay the debt. The status of limitations varies according to the type of debt and the state where the debt originated. In general, status of limitations can vary from 2 to 15 years, so debtors should consult their state laws.
Consider Debt Settlement Options
If you are considering debt settlement, you have two broad options: entering into negotiations personally or using a debt-settlement company. Using a company is tricky because of the prevalence of debt-settlement schemes, which accomplish nothing while adding fees to the debtor's financial burden. A settlement program through an approved counseling service or government program can be advantageous, however. Major debt companies may not accept applicants with debt lower than $10,000. Negotiating directly with creditors may be useful if you know the preferred outcome and are willing to compromise with the creditor.
Calculate Settlement Amount
Establishing a settlement amount is one of the most important parts of the process. You should carefully consider your current finances and decide how much of a lump-sum payment you can offer. You don't benefit from settling for an amount that puts additional financial strain on you. Common amounts offered for debts that are several years old are 20 to 30 percent of the principal still owed, but the percentage rises with new debts.
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