Is Debt Settlement The Best Alternative To Debt Consolidation?

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For many years now, people have been using the debt consolidation loan to clear off their debt. But many individuals have asked if debt settlement is the best option if they fail to come out of debt using debt consolidation. Maybe you can conclude after the 2017 American Fair Credit Council (AFCC) report. The AFCC is a group of companies that runs in the debt settling industry with an agreed code of conduct.

In their report, when you pay a fee of $1, you save $2.64 on average. In other words, for each $1, you save $2.64. The AFCC got their data from about 400,000 people who used debt settlement to get rid of their debts. The debtors had an account of about 2.9 million signed up in the debt relief programs from January 2011 to March 2017.

The study also shows that for all the people who settled their debts, 96% of them had their debts decreased, exceeding the associated fees. Also, from the fourth to the sixth month, you’ll get your initial account settlement. 

Living with a stockpile of debts every single day can be frustrating, overwhelming, and stressful. And when it’s too much for you to handle, your primary question could be, “which financial strategy can help you out of debt, and fast?”

If you’re struggling with an enormous debt owed, it can be alluring to look towards debt relief companies with the hope of decreasing your debt. But still, Is debt settlement the best option for you instead of loan consolidation? Let’s take a deeper dive, shall we?

What Is Debt Settlement?

When you settle your debt, it means you signed up with a debt settlement agency, and they agreed to make a deal with your loan creditor to decrease your repayment debt. In other words, you’ll be able to get out of debt by paying less of the original amount you owe. So typically, the remainder of your debt is forgiven. 

For example, let’s say you have a debt of $40,000 on your credit card. Your debt agreement agency negotiates with your loan creditor and offers to pay them $20,000 to clear off your debt. If they agree, you’ll save $20,000 less than your original debt amount.

How Debt Settlement Works

Depending on your financial condition, the agency can offer within 10% to 50% of the total amount you owe. From that range, your loan creditor will have to agree on which percentage range they’ll accept. Of course, you’ll have to pay a fee to the company, but the payment will not be as much as the money you save. They usually calculate the fee payment in an enrolled debt percentage. 

Enrolled debt refers to the amount of money you had when you registered in the program. According to federal law, the agency cannot charge you unless they’re able to clear off your debt through the negotiation finally. So you have to be careful of debt settlement scams that charge you before doing anything. Averagely, the fees range from 20% to 25%. 

You, however, don’t necessarily need to hire a debt settling firm. You can settle the debt on your own. If you decide to do so, you might need to learn how to go about it. So we recommend you acquire a debt negotiation expert who can give you the essential tips you need to land a good bargain. Also, the expert can help you detect debt settlement scams. 

If you’re not sure of where to begin, give us a call: 800-881-0687. Our team will gladly assist and do the best we can to get you out of debt.

Settling Your Debt Comes With Tax Deductions

Settling your debt also comes with tax deductions. The Internal Revenue Service (IRS) takes any student loan forgiven as taxable income. But there’s a way around it. If you can prove to the IRS that you have insufficient funds to cover your debts, they can forgo any tax deductions on your forgiven debt. If your overall liabilities surpass your entire assets, you will qualify for an insolvency. But, it’s better if you seek advice from an accredited public accountant to know if you are eligible for insolvency.

Freedom Debt Relief Data Analysis

According to the Freedom Debt Relief AFCC data, settling debt is the least expensive compared to low monthly repayment or credit counseling. But whether settling your debt will be cost-effective for you relies on your financial circumstances. And you also have to remember that, when it comes to getting out of debt, what works for others may not necessarily work for you.

The Dangers And Strategies In Settlement Of Debts

Interestingly, your negotiation power will be small if you signed up for a debt alleviation program and even made payments no matter how irregular. Those who did not make any payments have better negotiation power than you. So to be in a better position, you need to put a halt on your payments.

According to the co-president of Freedom Debt Relief, Sean Fox, your credit scores can have a negative impact while settling your debt. Especially at the initial stage. However, your credit score will return to its healthy state in due time when you start your payments on your settled debt.

 So, you can have a bad credit score when you settle your student loan debts. The credit score will likely be around 500, which is usually poor. If your score were high before you dropped behind, the decline in your credit score would be massive.

When you didn’t make on-time payments, it’ll show in your credit report for seven years. If you don’t make any payments, it means you’ll have accrued fees and interest adding up to your balance. However, if you’re not able to settle your debts, it’ll be challenging to pay back due to the increase. When that happens, you can expect phone calls from debt collection companies.

Loan creditors can also sue you if you have more than $5,000 in debt. If you’re not careful, you can end up in wage garnishment. So ideally, you need to have a lot of money to settle your debts, or else you are in danger of getting sued by your loan creditors. 

After this considerable damage, there’s no assurance that any loan lender will settle your debts for you. Even if the company decides to settle your debts, it’ll not be as much as you’d expect.

Caution From The CFPB

A warning from the Consumer Financial Protection Bureau states that, if you’re able to get a settlement on your debt, the accrued fees and penalties on your unresolved debts could balance out any amount discharged. It can happen, especially if the company were not able to settle the entire or majority of your debts.

Comparing Other Alternatives With Debt Settlement

Consolidating your debt and settling your debt are both ways to decrease your financial burden, and hopefully, get out of debt quicker. But they have different ways of working, and each of them has various financial issues they can effectively handle.

There are other options available if settling your debt has too many complications for you. Now, we will compare debt settlement with different options so you can understand which alternative works best for you. In the end, you’ll have an informed decision on which way to tackle your debt.

 Chapter 7 Bankruptcy And Settlement Of Debt

If the settling of your debt proceeds as planned, it can help you, the company you hired, and the loan creditors. First, you become debt-free with extra money in your pocket, the debt alleviation firm gets their fees, and the loan lenders get more than they would’ve expected. 

Had you stopped making payments or enrolled in Chapter 7 bankruptcy, the loan creditors might not have received what they got from you when you settled your debt.

Chapter 7 bankruptcy is when the court delegates an independent contractor to take over your case, sell your assets, and use the raised money to pay your creditors to clear off your debt. However, the contractor cannot sell your assets that are exempted from paying off your debt. Exempted assets are different in every state, but they generally include your residence, some retirement accounts, auto, and assets essential for earning a living.

If you compare settlement of debts to chapter 7 bankruptcy, the bankruptcy may be the quick way to come out of debt, that is, if you qualify. The bankruptcy is a legal approach that prevents you from having regular calls from debt collection companies and lawsuits. Settling your debts does not give you that option.

Chapter 7 bankruptcy may be an excellent way to come out of debt, but it has its consequences. You will have to give up some properties that are important to you. Besides, you may not want your financial crisis to go on the public record because you may find a hard time finding a good job. Why? Because most jobs do a background check into your credit history.

Challenges In Hiring A Bankruptcy Attorney

As if that’s not enough, you may not have the adequate funds to hire a bankruptcy attorney. But with settling your debts, everyone can sign up for a forgiveness program if you prove to be in a financial struggle. Some of the difficulties can be losing your job, medical expenses, divorce, death, etc.

If you’re able to get a chapter 7 bankruptcy, you can be free of any debt within three to six months, while settling your debts can take years. The bankruptcy reduces stress, and your credit score can get in good health quicker than settling your debt. 

But remember that it will take ten years before the bankruptcy gets cleared from your credit report. If you decide to go with settling your debt, take extra caution against debt settlement scams. 

You don’t want to be incurring huge additional debts on top of the previous debts you’re trying to get out of in the first place. One sign is to watch out for companies that request for payments before they assist you.

 Minimizing Your Monthly Payments And Settling Your Debts

debt relief

If you want to be financially free, making low payments every month is a bad idea. Especially if you have a high-interest rate, plus, you’ll not be able to save any money in the long run. It can take you several years, even decades, to pay off your debt, depending on the amount you owe and your interest rate.

Your interest rate accrued each day on your overall balance. With your minimum debt repayments every month, you’ll not make significant progress. But if you always make those low payments, while your interest rate hits the roof, you’ll be the right candidate for your loan lenders. And, of course, your credit score will improve if you have a good payment history.

But if you want our advice, we don’t recommend you exert your spending above your means so that you can enhance your credit score. Having a good credit score will not save you in your retirement years. But having a significant amount of money stored in the bank will help you. Also, if your available credit were high compared to your line of credit, it would negatively affect your credit score. Ultimately, it will affect your regular on-time payments.

According to AFCC, the average person had $25,250 when they registered for the debt alleviation program. The majority of the amount was debts on their credit cards. If these people had made $600 on their monthly payments, in around 36 years, they would’ve paid about $58,000. They would also have $33,000 in interest before they would have cleared off their debt.

Settling Your Debt And Credit Counseling

Federal government firms and non-profit organizations provide credit counseling. They are not expensive, and they’re somehow partially sponsored by credit card companies. If you sign up with a credit counseling firm, your balance interest rate can decrease, and your penalty fees dismissed. But all these may not be good enough to help you get out of debt faster.

As part of the requirement, you’ll have a new monthly payment which you may not be able to manage. Maybe you can, but it depends on your current financial status. Your interest rate may not decrease, regardless of your financial difficulty. But, your credit score may not take a massive hit since defaulting on your debt won’t be necessary.

If you go through with credit counseling, they can provide you with extra financial help. That way, you won’t have to go through the same difficulty in the future. The credit counseling companies can:

  • Help you develop a budget,
  • Counsel you on your finances,
  • Give you referrals on affordable services, and
  • Assistant programs to assist you in limiting your expenses

Which Option Should You Choose?

If you don’t want debt consolidation, which alternatives should you go with? Debt settlement will provide the best option if you have a debt over $15,000 on your credit card. 

If your unsecured debt is within $2,500 to $15,000, then credit counseling may be the best way to go. All you need is to get your interest rate decreased so that you can manage your monthly payments. Bankruptcy can help you if you have massive financial difficulty.

There are other options still available for you to explore if these options don’t work well for you. You can avoid all the third-party companies and negotiate with your loan creditors yourself. But before you do that, talk with an expert who can help you land a good deal, if you should win.

Conclusion

Debt consolidation is indeed one beneficial way to get out of debt, but it doesn’t work for everyone. If you’re one of them, debt settlement can be your way out. But it comes with its pros and cons, which you need to analyze before you proceed carefully. Settling your debts is an easy way to get out of debt, but it depends on the amount you owe.

There are other considerations you need to factor in when you settle your debts. For example, the time it’ll take before you become financially free, and how stressful it is when you compare it to other options of clearing your debts. So you have to understand the pros and cons of settling debts before you go ahead. 

Also, take extra precautions that you don’t fall for debt settlement scams. They can worsen your financial situation and take a longer time to get out of debt. 

The best way is to have an expert lay on all the options. That way, you can know the best chances of coming out of debt. If you want help, our team will be there to assist you in every step of the way. Call us on 800-881-0687, and we will gladly assist you.