The Best Debt Settlement Solutions

Taking steps to eliminate your personal debts is key to getting your financial life back on track. Opting to negotiate and settle debts is perfectly legal, although you should be cautious with whom you do business. You should also be aware that your credit rating will take a serious hit; although, if you're late already, chances are it's already poor.

The Best Debt Settlement Resource

Contact the National Foundation for Credit Counseling to review your options. Their counselors, who are certified in debt and budget management, will give you a free consultation. Sessions are available online or over the phone and are confidential. As the nation's oldest nonprofit devoted to consumer debt management and education, the NFCC enjoys a sterling reputation as the nation's finest resource for debt management and settlement solutions. Fees for management plans are minimal, although settlement solutions are more costly and vary, depending upon how much debt you need to settle and the state in which you reside.

How Debt Settlement Works

In a debt settlement plan, a consumer who is already considerably behind on payments pays a negotiated sum that's a fraction of the original outstanding debt. Borrowers must be at least three to six months behind before a company will consider settling the balance. Generally, it's wisest to deal directly with the lender before it goes to collection; collection agencies are aggressive and will most likely pursue delinquent borrowers for months. You also won't want it noted on your credit history that the account went to collection.

Credit cards and other unsecured loans are the best candidates for debt settlement plans. Loans that are secured by assets, such as cars and homes, will be subject to the seizure process (although many homeowners are negotiating their mortgage balances in 2011 as a result of the housing market's downturn).

Your Options

Borrowers may approach debt settlement several ways. The NFCC will put you in touch with a reputable settlement company. You can attempt to find a local company yourself (always making sure to check their reliability rating with the Better Business Bureau). Alternatively, you can attempt to settle the debt yourself. Doing it yourself will save you money, but it won't be easy.

Payments to creditors can be made over several months or in one lump sum. Lump sum payments offer the most savings, and if you're planning to settle your debts, begin saving for the settlement as soon as possible. Many settlement companies will suggest putting money into an escrow-style account during the delinquency period to be used toward the settlement.

Be wary of debt settlement companies that collect their fees in advance of negotiating your settlement; there is little to prevent a disreputable company from walking away with your money before one dime has been negotiated.

An Alternative to Debt Settlement

Remember that settling your debt will have a profound effect on your credit history (especially if your credit was excellent to begin with). Most of your credit score is comprised of your history of timely payments and debts owed, so delinquencies and high balances hurt. Settlements will not appear as "paid in full" or "as promised" on your report; expect your score to suffer for at least one to two years.

The NFCC may offer participation in a debt management plan. DMPs pay the debt in full over a predetermined term, less than five years. Interest rates and payments are reduced, accounts are marked "current" and also closed. DMPs do not affect your credit as negatively as settlement does.

Bankruptcy, another debt settlement solution, is your option of last resort. Counseling will be required, and you will need an attorney. Your credit will suffer for at least 10 years, and it may affect your employment status. Your unsecured debts will be wiped out, but consider your options carefully before proceeding down this path. You may not need it.