What is Debt Settlement and How Does it Work?

Filed under Debt Settlement by on January 16, 2010 at 9:24 pm {no comments}

Debt settlement, also referred to as debt negotiation, means that your debt is negotiated down to a reduced amount and your account is settled in full; paid to a zero balance.

Debt settlement is the process of negotiating with your creditors to settle your debts for less than what you owe, typically for about half of the current balance. This process is not an exact science and is best described as “good, old-fashioned haggling.”

Debt settlement usually only works with unsecured debts such as credit card debt, personal lines of credit or medical debts, but can also work on secured debts after repossession or foreclosure.

Historically, settlement amounts within 40-60% of your outstanding balance are realistic. For example, if your debt is settled for 40%, that means your $50,000.00 in total unsecured debt is settled for about $20,000. Some creditors may not accept settlement of less than 60%, while other creditors may settle as low as 10-25%.

Settling debt can help consumers save significant amounts of money and get out of debt very quickly, typically in 12-36 months or sooner if funds are available.

These incredible savings in time and money are especially significant when compared to paying the full balance plus interest over a long period of time:

$50,000.00 in credit card debt at 18% interest would take 502 months (42 YEARS) to pay off with minimum payments of $1,225.00, at a total cost of $124,428.96.Compare this to debt settlement, which would have the same person out of debt through a debt settlement program in just 24 months at payments of $1,200 and a total cost of about $28,800.

The same person might also choose a 36 month debt settlement program with even lower payments of $825 a month and a total cost $29,700.

Debt settlement is one of the most effective debt relief options available for consumers experiencing a financial hardship. It’s a great choice if you have more debt than you can afford to pay off and you’re falling behind, or just about to fall behind, on your monthly payments.

Getting out of debt as soon as possible is always best when you are paying interest, especially if you are being charged interest rates of 20-30% after falling behind on payments.

Why would you credit card company, commonly referred to as a “creditor”, choose to settle debts rather than continue to charge you interest and late fees month after month?

Well it’s really a matter of dollars and good sense…

Creditors know that if you get into a bad financial situation and you can’t make your monthly payments you may decide to declare bankruptcy, and in this case they may get nothing. Therefore, given your hardship, rather than risk getting nothing, the creditor is usually very willing to settle for a lower amount.

The most common alternative to settling debts with consumers for a creditor is to sell the debt to a debt collector. In 2006 the average amount paid for “bad debt” in America was $0.034 on the dollar. THis means a $10,000 account is sold for an average of $340. So you can see why a creditor would glady accept 50% instead of selling to a debt collector. You can also see why debt collector are willing to settle for half or less when you consider how little they pay to aquire your account.

Once you enroll in a debt settlement program, the first priority is to effectively minimize creditor’s phone calls. Your total unsecured debt amount is reduced while providing just one low monthly program payment. Your monthly program payment amount is often as much as half your current combined monthly payments to the same creditors.

What’s the Bottom Line on Debt Settlement?

Debt settlement is the fastest way to get out of debt for the least amount of money while avoiding bankruptcy.

Here To Be An Asset To You,

Jesse Niesen
DebtGoToGuy.com

Hit the Like button

Get Out of Credit Card Debt FASTER: 8.5 Tips to Find Extra Cash!

Filed under Credit Card Debt, Money Management by on December 2, 2009 at 7:23 am {one comment}

Do you have any kind of lump sum to put towards paying off your debt?

If you’re even a little bit concerned about your cash flow right now because it’s limiting some of your debt relief  options, then you may be curious how many of my debt free clients discovered a variety of creative ways to increase their cash flow to get out of debt faster, such as: (more…)

Debt Relief Options: Debt Settlement

Filed under Debt Settlement by on January 14, 2009 at 9:40 am {no comments}

What is debt settlement?

Debt settlement is the process of negotiating with your creditors to settle your debt for less than what you owe. One thing you need to realize is that this program works best for people that are soon approaching or already in a financial hardship of some kind. You don’t have to wait until Hell or high water comes, if you see it coming you can be proactive and debt settlement may be a very good solution for you even if you haven’t taken a tumble yet.

If you are going towards that tumble, or you’ve already fallen behind, you’re on that treadmill, especially if you’re paying high interest on a lot of debt, this may be a very attractive option for you.

Debt settlement is definitely the most popular option out there…

BUT THERE’S A LOT ABOUT DEBT SETTLEMENT YOU MUST KNOW, BEFORE YOU EVER EVEN THINK OF ENROLLING INTO A DEBT SETTLEMENT PROGRAM!

Put yourself in the shoes of creditors, what can you do?

Lawsuits…

Collectors and creditors alike would love for you believe they want and will sue you, get a judgment, garnish wages, etc.  They bank on this general fear, but you may be shocked to learn the truth about how unattractive lawsuits actually are to creditors.

Let me be clear, a creditor can, and may, file a lawsuit against you if you default on your debt (fall behind on payments).  They could sue you if you’re a day late.  This is obviously unreasonable, but what’s not so obvious is how unreasonable lawsuits are in general, even if you are severly late.  Your creditors DO NOT want you to know this, as they would rather you live in fear thinking they could flip a switch and get a garnsihment or have you put in jail – neither of which is true.

Here’s why it’s not attractive to a creditor to sue you:

  • 80% of judgments are never paid
  • “Hard to squeeze blood out of a turnip”
  • Higher likelihood of BK = Creditors get nothing
  • Court cost and attorney fees must be paid, adding to the creditors risk
  • Statute of limitations
  • 3 year factor

Collectors…

  • Average amount bad debt is sold for is 3.4 cents on the dollar.

Traditional choices for creditors with customers in a hardship: sue or sell to collector…

So when a debt settlement negotiator comes along and offers 40, 50, 60%, it’s a smoking deal.

Debt settlement is actually the best way for your creditors to get the most money from someone in a financial hardship!

This is why debt settlement is such a popular option, because not only do we save you a ton of money, but it’s also a great deal for the creditor. You see, they account for a certain amount of people every year to be in a hardship and unable to pay.

How Debt Settlement Works

When you enroll into a program for debt settlement you sign a limited Power of Attorney. That limited Power of Attorney is sent out to each of your creditors. It basically says to them that you’re in a financial hardship, you will no longer be making any regular monthly payments, and instead you’ll be saving up your money to settle the debt in the future. It’s also a notice for your creditor to no longer contact you, but to contact your negotiator who is representing you. It informs them they will be contacted in the future when you have enough money saved up to offer a settlement.

From that point forward, you no longer make any regular monthly payments to your creditors. You’re going to make one payment each month for the same amount, the same time each month, to a special purpose account that is set up for you. Each month your payment is transferred from your regular account into your special purpose account. Your payment amount is usually substantially less than your current minimum monthly payments that you’re making on your cards.

This account will build up month after month. Once you’ve saved enough money in that account to offer a settlement to one of your creditors, your debt settlement negotiators will contact them and negotiate a one-time lump sum payment to settle the account to a zero balance. This typically can be negotiated to about half of what you owe.
Once a settlement is made, your debt for that account is wiped out forever.
Month after month goes by and your funds build up again, and they’ll settle the next account, and so forth, until usually within about 24 months you’re completely debt free by settling all of your accounts.

That’s the main process of how debt settlement works. There are fees for the program. Usually with the fees included, you are going to pay about two thirds of what you owe and you’ll save about a third of what your current balances are right now – whatever your total debt is.

Keep in mind that the fees would be included in that two thirds that you actually pay. It’s also included in the monthly payments that you get as a quote so those fees are known about up front and taken out over a period of about 18 months.

Fees and everything included, you are still saving a ton of money. Not just the third or so of your current balance, but also all the future interest and fees that you will no longer have to pay.
When you go through this program, interest and fees are effectively eliminated. The creditors will still say “you owe interest” or “you owe fees” once you stop making those payments, and the balance may increase, but negotiations with them are based on your current balance when you enroll.

When you’re given a quote, that’s a quote for the total cost, meaning basically all the additional interest and fees come out in the wash. Whereas by example, if you were just going to make minimum payments; if you’re paying 20% to 30% in interest, you’re going to pay two to three times what you owe in interest alone by the time you get that paid off.
That’s a tremendous savings! Now you’re getting out of debt quickly in 24 months and you can take that savings each month and invest it to start earning interest; where your money is working for you.

The difference it can make say 30 to 40 years down the road:

If person ‘A’ were making minimum payments and it took them 30 or 40 years to pay off their debt; person ‘B’ went through debt settlement and after two years began investing money and earning interest, then by the time person ‘A’ is out of debt, person ‘B’ is a millionaire. That’s the difference. It’s not that complicated over all, it’s just a matter of learning about it and doing it, taking action.

Cost & Savings of Debt Settlement

There are fees for these programs. Usually with the fees included you are going to pay about two thirds of what you owe and you’ll save about a third of what your current balances are right now, whatever your total debt is. Most importantly; eliminating your debt quickly will allow you to take control of your cash flow, stop paying interest and have cash every month to save, invest and get your money working for you.

After you graduate and your debt is completely wiped out for a fraction of what you owe, not only will you have saved over $10,000 from your current balance (if you’re in the average client bracket), but you will be saving tens of thousands of dollars that you would otherwise pay in interest to keep your credit score where it is in the short term. You also will have ALL the money you’re currently paying in minimum payments BACK in your pocket.

Now I know you may like shopping. Hey, I’m a guy who likes to shop too. Let me tell you… taking CASH out of an interest earning account working FOR me 24/7 to go buy shoes, clothes, dinners, vacations, and nights out on the town feels so much better than it ever did charging up a credit card, constantly working against me.

Overall, what we’re looking at here is the difference between being a slave to debt with money working against you vs. being debt free with money working for you.
The difference is huge.

Was this valuable to you?  Feedback?  Question(s)?

Please share your thoughts and ideas below.  I respond to any questions posted as a comment in detail by email.

Thank you for the opportunity to serve you!

Here To Be An Asset To You,

Jesse Niesen
DebtGoToGuy.com

Hit the Like button