Debt Settlement–What you should know

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Debt settlement is one of the latest ways of getting debt relief. I would put it somewhere between debt counseling and bankruptcy. Where debt counseling will not have a considerable negative impact on your credit as long as you make your payments on time, debt settlement is another story.

Many lenders don’t even want to talk about debt settlement until you are 3-6 months past due. If you plan on settling, you will need to be prepared to pay the agreed upon settled amount in one payment. In order to have that money, you may have to stop making your payments to save the money for the settlement payment.

There are many companies that will negotiate with your creditors on your behalf. The companies are called debt settlement companies. While they are convenient, they can be quit expensive. Most of them have fees and many of them will charge you 25 percent of what they save you. So, if you have a $2,000 debt and they get your debt reduced to $1,000, you will owe the debt settlement company $1,250, $1,000 to settle your debt and $250 to the debt settlement company for negotiating your debt.

While it is convenient to have a company settle your debt, you can do it yourself for a lot less money. You will normally get your best deals at the end of the month. The collectors generally work on commission and they will many times take less to settle a debt at the end of the month, so they can meet their goal.

Keep in mind that any amount of the original debt the was not paid can be considered income and you may be required to pay taxes on this money. Also, this debt will be noted on your credit record as “settled for a lessor amount” and that will most likely stay on your credit report for several years.

Debt settlement is an option for debt relief, but understanding how it works is essential.

So - pay yourself first. The recommendation is that you save 10% of your net pay. If you cannot start that big then try even 2% or 3%. The key is to make it automatic. Have the amount you are saving deducted from your paycheck or from your checking account into a savings account. This is one separate account or maybe several if you are saving for multiple goals. Make it difficult to access this money. Do not have an ATM card for this account. Use a bank that is out of town or across town from where you normally do your banking. Or use an Internet bank such as IngDirect or EmigrantBank.

Tags: debt settlement, debt negotiation, debt relief, debt solutions, debt management