Debt settlement is the process of contacting your creditors and negotiating a payoff amount that will save you money on your high-interest credit card debt. Whether you do your own debt settlement or you hire a professional debt settlement organization, there are things you should know about debt settlement that will help you to make the right choices. Debt settlement is only one debt relief option; know the facts before getting involved.
Not Always an Option
While creditors would prefer to receive a negotiated payoff than risk getting nothing if the consumer goes bankrupt, debt settlement is not always an easy option to pursue with creditors. Creditors are not required by any state or federal laws even to discuss debt negotiation with consumers. You will also find creditors unreceptive to debt settlement if you are current on your payments or only behind one or two months. While debt settlement may sound like a good option, it is not always one creditors are willing to pursue.
Stay in Touch
If you hire a debt settlement organization, one of the actions it may suggest is to stop sending payments and cease all communication with you creditors. Consumers must remember that the contractual obligation to repay their debt is with the creditors and not the debt settlement company, according to Karen Haywood Queen, writing on the Bankrate website. If you stop making payments and communicating with your creditors, your credit score could be at risk and your accounts could go delinquent. Stay in touch with your creditors to make sure the debt settlement company is attending to your debt as promised.
Costs
If you feel more comfortable contracting with a financial professional to negotiate your debt, be prepared to pay substantial fees. Some of the fees charged by debt settlement professionals include an account set-up fee, a monthly administration fee and a percentage of the money eliminated from your debt that could range from 18 to 25 percent of the total savings. Ask to see a complete schedule of fees from a debt settlement organization before you sign an agreement.
Your Credit
Debt settlement can be a way to help reduce your credit debt, but it can also damage to your credit score, according to the Federal Trade Commission. When you settle a debt, you ask the credit card company to accept a payment that is less than you owe. This will result in a negative mark on your credit report and an drop in your credit score. The cycle of late and missed payments that lead up to the need for a debt settlement may be over, but the final effect of a reduced settlement amount will linger on your credit report for years.
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