Carrying thousands of dollars’ in debt can feel like being stuck between a rock and a hard place, so to speak. On one hand, you’re unsure how you’re ever possibly going to pay off all the money that you owe — especially because life events and circumstances outside your control often make it difficult to have the funds to stay on top of those bills. One the other hand, though, you want to avoid filing for bankruptcy because you could have to liquidate certain assets and this course of action can stay on your credit report for seven or 10 years.
One possible option somewhere between defaulting on your loans altogether and declaring bankruptcy is debt relief, also known as debt settlement. Although some people try to settle their debts on their own, many others pursue this strategy through special programs.
Here’s more on how a debt relief program through a settlement company works.
What the Debt Relief Process Looks Like
The ultimate goal of debt settlement is to bring down the amount you owe creditors. How? By negotiating with them — essentially offering them a given percentage of the total balance with a firm payoff timeline. Lenders may reject the offer, accept it outright or go back-and-forth on the exact terms of the agreement before settling.
Making a legitimate offer requires you saving up a certain percentage of your balances. So, a debt relief program will necessitate you make routine monthly payments until you’ve accumulated those funds — your “bargaining chip.” At this point, the program’s negotiation representatives will reach out to creditors and make the offer.
When a settlement is successful, you’ll pay off your creditor with those funds you’ve saved and pay an agreed-upon fee to the settlement company for handling the negotiations. Good relief firms will never charge fees up front because this is illegal under Federal Trade Commission regulations; they will take fees (usually 15 to 25 percent) following successful resolution of a debt.
After you pay off a debt, your creditor will report this action to credit reporting bureaus
Which Debts Qualify for Debt Relief Programs?
The first step is always figuring out if your debts are eligible for any certain program.
According to one of the most prominent debt relief program companies, here are the debts that may be accepted:
- Credit cards
- Personal loans
- Medical bills
- Some private student loans
- Some business debts
Secured debts — like auto loans, mortgages and federal student loans — are not eligible.
Debt relief generally works for unsecured debts, like credit cards, that are not backed by any assets as collateral. The reasoning here is that lenders can repossess collateral on secured loans, like your car or your home, if you stop making payments. So, it is not possible to negotiate down what you owe on secured debts. On unsecured debts there is often room to negotiate because lenders are at risk of getting nothing if you default.
Debt settlement is also generally an option for people who have already missed payments due to financial hardship. Why? Because many enrollees choose to divert funds into their account ahead of negotiations, which can lead to more missed payments and a negative effect on credit. This is why it’s important to commit to debt relief — which often takes two to four years — if you hope to reap the benefits of addressing your debts.
Asking lots of questions about how a debt relief program through a settlement company works before signing up will help you know just what to expect in terms of the risks, the rewards, the timeline and the requirements.