Many people have debts. It’s becoming easier and easier to get credit and financing, and the economic situation has made it harder and harder to pay down these debts in an effective manner. It’s no surprise, therefore, that so many people have been looking for ways to resolve their debts or that so many people have gotten into debt problems in the first place.
Thankfully, there are a number of different things that you can do to lower your debt burden and get back on track with your payments. One option that some people consider id debt settlement. We’ll compare debt settlement to some of the other options for covering your debts to understand when the right time for debt settlement is, and when you should be looking to other methods for resolving your debts.
What is Debt Settlement?
Debt settlement is a process where you agree to pay a creditor an amount less than the value of your debt, usually in the form of one lump sum payment. This can save consumers some money and help them get out from under debt that they’re struggling to make payments on. However, debt settlement does have its drawbacks. Your credit score will be lowered and you won’t have the same access to credit and financing that you otherwise might. Moreover, not all companies are willing to settle debts, and there’s no legal obligation for them to do so. You’ll also probably have to pay a company or lawyer to help you, and you’ll have to save up the lump sum payment before you can approach your creditor with a settlement offer.
What are some alternatives?
When it comes to resolving debt, there are a few alternatives in addition to debt settlement. One of the most popular is consolidation loans. Consolidation loans work by taking out a new loan and using it to pay off multiple other debts, consolidating your debt into one place. This can save you money on interest rates and make it easier to keep up with your payments, because they’re all in one place.
Another alternative is forbearance. This option means that the company agrees to relieve you of the responsibility to pay your bills for a period of time while you resolve some kind of hardship and resume your payments. While the loan or credit is in forbearance it will continue to accumulate interest, but you won’t be logged as missing any payments or being behind on payments. This can help your cred score and give you the breathing room you need to get your financial ship in order.
Finally, you can consider bankruptcy. In a bankruptcy you are shielded from debt collections and your assets are divided among your creditors. You then start over with no debt and have to rebuild your credit history and profile. Bankruptcy can wreak havoc on your credit score, but it does allow you to discharge debts you aren’t able to maintain.
When is Settlement the Right Choice?
Debt settlement is the best option in very few scenarios. If you have the money to make a lump payment, then you can probably afford your monthly payments. Moreover, debt settlement will also ruin your credit score, and you’ll still have to pay back a large portion of what you owe, so it’s not as advantageous as bankruptcy in most situations. Finally, if you’re only in short term trouble, but have things turning around, then forbearance is usually a better option, as it doesn’t take your credit score down and only costs the accumulated interest on your balance.
This means that debt settlement is the right choice when a debt can’t be discharged through bankruptcy, like student loans, and when you have access to money that can be used to pay off a settlement but isn’t available for your monthly payments. Finally, for debt settlement to make sense, you need to be in a situation where you either cannot obtain a consolidation loan, or you have debt that cannot be consolidated.
As you can see, debt settlement can be an effective tool, but it’s only truly the best option in very limited situations. Make sure you thoroughly investigate your financial options before considering debt settlement.