Debt settlement is a process of convincing creditors to accept less than what you owe and save dollars. This process involves making a lump sum payment to creditors in exchange for a reduction in the payoff amount.
Over the years, debt settlement has gained popularity due to its ability to provide fast financial relief to debtors. Depending on the amount you owe and the number of creditors you have, the process usually takes 2 years to resolve your debt problems. However, like 2 sides of a coin, debt settlement has one demerit too.
Debt settlement hurts your credit score since creditors don’t receive the full amount. Suppose, you borrowed $10,000 from a lender for covering your expenses and paid $6000 at the end of the settlement process. This means that you’re not paying the rest $4000. It’s a financial loss for the creditor and FICO credit scoring model penalizes you for this activity.
Don’t get disheartened. Your life is not finished. You’ll get a lot of time to rebuild your credit score and plan your personal finance.
Scenarios when debt settlement is good for you
There are various scenarios when debt settlement is the best answer to your financial problems. Here are a few of them.
1. When you can’t afford to pay your debts
Debts, credit score, and lawsuits are interlinked. When you can’t make your monthly payments due to financial problems, your credit score gets a big blow from the FICO scoring model. Your credit score drops significantly. Plus, you increase your chances of getting sued.
Creditors won’t sit quietly for long when you don’t make payments to them for months after months. First, they will impose late fees, penalties, and fines on you. This will increase your outstanding debt. Next, they will assign your accounts to collection agencies. Finally, they will file a lawsuit against you to garnish your wage or impose a lien on your property. This can hurt your financial life even more.
Debt settlement can save you from this ordeal. When you settle debts, creditors would stop giving negative information (mainly missed or late payments) to Equifax, Experian, and TransUnion. Moreover, creditors won’t sue you since they are receiving payments. And, the best part is that you don’t need to pay late fees and fines to creditors. All these things will be waived off.
2. When you want to avoid debt collection calls
Honestly speaking, no one wants to get pesky debt collection calls every day. But what can you do when you have multiple payday loans or personal loans or credit cards on your shoulder?
Sure, payday loans give you a big relief when you’re in a short-term financial crisis. They help you to overcome the financial crisis without asking for money from your friends. But you have to pay them back with your next paycheck. If you can’t pay off the principal amount along with the interest with what you earn, then you’re in big trouble.
Payday loan companies need their money. If you don’t pay them back, then you’re likely to receive debt collection calls every day. Debt collectors will call you between 8 am and 9 pm, and demand for payments.
Some debt collectors don’t even bother to follow the rules and might threaten to seize your properties. Sure, you can take action against them later but you have to endure harassment every day.
Some debt collectors can even sue you to collect money. If you still ignore your payday loans, then be prepared for wage garnishment.
In this situation, payday loan settlement can act as a savior for you. It can help you to get rid of payday loans by paying less than what you owe. Just know how payday loan debt settlement works if you have doubts. You’ll get all your answers.
Once you settle your payday loans, you won’t receive any more debt collection calls. Your life will be peaceful again.
3. When you’re planning to file bankruptcy
Sure, bankruptcy has lots of benefits. It imposes an automatic stay on the lawsuits and wage garnishment. It stops the pesky debt collection calls too. But there are a few serious drawbacks of bankruptcy. For instance, bankruptcy drops your credit score by more than 200 points.
Yes. It hurts a lot. Big time.
Plus, bankruptcy is a complex legal process. There are too many rules and regulations, which you don’t know. You have to hire a bankruptcy attorney for that and pay his legal fees, which can be a lot. Believe me, it is way more than debt settlement fees. Moreover, you might lose your valuable properties in Chapter 7 bankruptcy. Are you willing to take that risk?
If you file Chapter 13 bankruptcy, then you have to lead a very strict financial life for 3-5 years. You have to deal with those debts for 5 long years. You can’t create an emergency fund. If you receive a windfall, you have to report it to the bankruptcy court, and use it for paying off your debts.
Your life won’t be in your control.
Debt settlement is a far better option than bankruptcy. You don’t have to pay expensive fees. You don’t have to endure debts for 5 years. You can save money and build an emergency fund. Plus, your credit score won’t drop by 200 points. So if you’re overwhelmed with debts and planning to file bankruptcy, then consider debt settlement first. This option would help you take care of debts, save money, and be the boss of your life.
Sure, debt settlement hurts your credit score. But, you can soon apply for a secured card to rebuild credit. By making payments on time, you can increase your credit score gradually. After you have settled debts, you’ll have enough money to make timely payments. And, if you can follow a budget, then you can free up more cash. Use it to build an emergency fund to avoid getting into debts in the future.