Debt management comes in many shapes and forms. Some groups provide education and training to improve your budgeting skills, while others consolidate your debt into a new loan with an overall lower interest rate and monthly payment. Debt settlement companies also fall into the realm of debt management and have their own set of characteristics. You should familiarize yourself with these if you are considering this as an option to get your debt under control.
Stop Making Payments
One of the first things a debt settlement company will instruct you to do is to stop making monthly payments to your creditors. Not paying your payments seems like the complete opposite thing to do in an effort to pay off debt, but it starts the process that allows these companies to do their job. Once payments stop, you will be reported to the credit bureaus as being late or delinquent which naturally will harm your credit score and creditworthiness. However, most creditors are not interested in discussing settlement while your account is in good standing. Once the payments stop coming in, the creditor puts the account into a chargeoff status and is more willing to discuss settlement.
Monthly Payments for Your Escrow
Although you are not paying your creditors during the debt settlement process, the debt management firm you hired will be collecting a monthly payment from you. These funds get placed into an escrow account to be used by the debt settlement firm when negotiating with creditors. The monthly contribution to your escrow account also represents your continued enrollment in the program
Negotiate Settlements
Your debt settlement firm will take the lead on negotiating settlements with your creditors. The settlement is where the potential debt savings come into place. Your firm will speak individually with each creditor and determine what an appropriate settlement will be to close out the account. The settlement amount is typically less than what is owed on the credit card. Once a settlement is reached, your settlement firm will remit payment to the creditor using the funds you have available in your escrow account.
Contingency and Administrative Fees
Debt settlement companies may be helping you reduce your debt, but they are also trying to make money. Most firms assess contingency fees based on the amount of debt they were able to reduce. These fees are expressed in the form of a percentage, which can be 20 to 30 percent. For instance, if you owe $5,000 on a credit card, and your settlement firm negotiates a $2,500 settlement and charges a 25 percent contingency fee, you will pay $625 as the contingency fee. Settlement firms may also charge administrative and other maintenance fees, such as monthly program charges and fees for disbursing payments. These fees are also paid out of your escrow account.
Long-Term Consequences
The only true way to escape debt without enduring future consequences is to pay your outstanding balances as agreed. When a debt settlement company succeeds at negotiating payoffs, you will likely have to endure some long-term consequences. Your credit score and creditworthiness will be severely damaged by the multitude of late payment and charge off reports. Individual creditors that you settled accounts with may never extend you credit again. You may also have income tax liability on any amount of debt that was extinguished, and it is possible for the creditor to still place the remaining charged off balance with a collection agency.
0 comments:
Post a Comment