If you owe a large amount of money to a creditor, you may be trying to figure out how to get out of debt as quickly as possible. One option is to obtain a debt settlement. Debt settlements are when a creditor agrees to let you pay back an amount that is less than what you owe, but the payment will completely eliminate your debt. However, you’ll need to make this payment to your creditor immediately.
Who Can Obtain A Debt Settlement?
One of the major downsides of using debt settlement as a way of getting out of debt is that creditors will almost never agree to a settlement unless the company has reason to believe you can’t pay back what you owe. This generally means that you’ll need to stop making payments to the lender.
While you are not making payments, it is likely that you’ll rack up late fees and other charges, and you aren’t even guaranteed that the creditor will agree to a settlement. Moreover, if the creditor in question runs a credit check and sees that you’re paying other lenders, they may refuse to allow you to settle your debt for less than what you owe.
In other words, for a debt settlement to even be possible, you have to be in pretty bad financial shape. However, if you are in this position, a debt settlement may allow you to eliminate your debt for a fraction of what you owe.
Arranging A Debt Settlement
The two most popular ways of arranging a debt settlement are to either go through an agency or to handle the negotiations on your own. While third-parties can help you obtain a debt settlement, the Consumer Financial Protection Bureau points out that there are several potential downsides to using settlement agencies.
Agencies typically charge a percentage of the amount that you settle for, and that can be a significant amount of money. For example, if a settlement agency charges a 20 percent fee and you settle with a creditor for a $4,000 lump sum payment, you’ll be expected to pay a settlement company $800 for their services.
That said, even with fees, you may still be saving a substantial amount of money with a settlement. What you save could more than make up for any fees charged by the settlement agency. Furthermore, you do not have to pay any fees until a debt settlement as been agreed upon by you and your creditor.
If you opt to handle the settlement yourself, you’ll need to get in touch with your creditor and see what arrangements can be made. In situations where your account has been passed on to a collection agency, you can still potentially obtain a settlement.
Alternatives For Eliminating Debt
Along with arranging for a debt settlement, you may also be able to eliminate your debt by making a payment arrangement with a creditor or filing for Chapter 7 bankruptcy. Payment arrangements may allow you to reduce your minimum monthly payments to a creditor, and you may also be able to have late or overage fees waived. However, if you owe a substantial amount of money, this may not be enough to help you get out of debt.
Chapter 7 bankruptcy may enable you to have unsecured debts discharged. To be able to file for Chapter 7, you must meet a number of requirements, including passing a means test and having gone through credit counseling. A bankruptcy filing can show up on your credit report for up to 10 years, but for some people, bankruptcy is the only way to eliminate their debt.