Wednesday, December 15, 2004

Reliable Debt Settlement

Although debt settlement may appeal to you because it promises a way to get out of your debt for less, the impact on your credit will be devastating no matter how you go about it. Even when you take precautions to avoid scams, you will damage your credit before you even qualify for settlement. If you have decided to follow through with debt settlement, it's important to know how to find reliable resources.

Debt Settlement

    When you qualify for debt settlement, you make a one-time payment for a percentage of your existing balance, and in exchange, the rest of the balance is forgiven. Usually, the single payment is between 20 and 75 percent of what you owe, according to MSN Money. Creditors only agree to debt settlement if they believe you are on track for bankruptcy, which usually means defaulting on your payments as proof that you cannot make payments. In lieu of receiving nothing, creditors agree to take a partial payment as a settlement for your debt.

Scams

    Many so-called debt settlement companies have scammed people out of thousands of dollars, so it's important to find a reputable credit counseling organization rather than submitting to a debt settlement company that is persistent in contacting you. Debt settlement companies have a bad reputation because many have asked clients to make deposits into accounts where they "hold" the money while supposedly negotiating with the clients' creditors--then never making those negotiations or payments. Even with settlement companies that do follow through with negotiations, the fees are usually so high that the client would have been better off paying the full balance.

Credit Counseling

    A reputable credit counseling organization isn't focused on getting you to choose debt settlement as an option. Their main goal is to help you strengthen your credit by identifying your financial struggles and working with you to create a budget. After carefully reviewing your financial situation, a credit counselor will help you choose among your debt relief options, which may include debt consolidation, settlement, a debt management plan or even bankruptcy. The National Foundation for Credit Counseling recommends trustworthy credit counseling organizations on their website.

Self-Help

    You may also be able to negotiate debt settlement on your own; however, it's important to understand what creditors are looking for in debt settlement candidates. In general, you must have defaulted on payments for at least three to six months, according to MSN Money. At that point, Zip-Debt co-founder Chuck Phelan suggests calling your creditor and letting them know that you have a certain amount of money to offer as settlement for your debt, or else the company will receive nothing. If they agree, get the settlement in writing and make sure your credit report is marked as "settled" and not "account closed by creditor," which is more damaging for future borrowing.

Warnings

    Debt settlement is extremely damaging to your credit, even if you handle it through a reliable credit counselor or on your own. MSN Money writer Liz Pulliam Weston points out that a payment missed by over a month has the ability to sink your score by 110 points--with debt settlement, you're looking at several months of missed payments. Also, keep in mind that you need to have a fairly large chunk of money to put down for debt settlement. You will also have trouble borrowing money in the future, since lenders are wary of lending to those who have only made partial payments on their debt in the past.

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