How it Works
There are several types of debt that can be settled with negotiation: credit card debt, income tax debt, medical bill debt, business loan debt and generally any debt that is unsecured. Some debt settlement companies specialize in certain types of debt, so it pays to do research and find the right company for your situation.
There are several companies out there, but there are only a handful that have proven programs. Most offer free consultations and work solely on your behalf. You will be looking for companies that are experienced in debt settlement and have a history of successful settlements and have hundreds of happy clients. After extensive research, we’ve found that two such reputable companies are Hoffman, Brinker & Roberts and CuraDebt.
A Few Things to Watch Out For
Be sure the company is registered with the Better Business Bureau and has been in business for at least 5 years. Remember, this is your financial future you are handing them! Ask about their fees. Watch out for companies that will charge a high “administrative” fee upfront, and take a large portion of your monthly payment (if you’re paying them monthly) for themselves. This type of fee structure leaves you waiting too long to save up enough to settle a debt.
Soon after you contact a debt settlement company, the representative working with you will evaluate your debt load and creditor list. Then they can make a confident estimate on how much you will be able to save based on their experience with your particular creditors. Remember, they’ve done this before! This figure can range anywhere from 30% to 75%. In some cases, it can be higher.
After signing on with a company, the first step is to authorize them to work on your behalf. This enables them to handle almost all communication with your creditors, including statements and phone communication. The next step for them is to set you up with an affordable payment schedule, if needed. They may also help you find sources of money in lump sums that you have access to (gifts from relatives, home equity loans, other assets, etc.). Fees vary from company to company.
Most creditors will not want to talk settlement with you if you are current or only a month or two behind in your payment. If you are at least 3 months behind, then they will start to get the idea that they may not see another dime from you, at which point, settling with you looks better and better.
If you are significantly behind in your payments (3+ months), the negotiating can begin. Your settlement company will keep you updated on their progress and will let you know when they believe they have a good settlement offer in hand. When you agree to a settlement, and have the funds available, the settlement will be made on your behalf with your creditor.
You are now free from that debt!
Remember, it will usually be significantly less than what you actually owed, and will be marked ‘paid’, ‘settled’, ‘charged off’, or something similar on your credit report.
What You Might Experience
Some pesky creditors may continue to call. Your best bet is to ignore them. Invest in CallerID, if you don’t already have it. It will definitely help you avoid some uncomfortable conversations. If that’s not possible, and you find yourself in a conversation with a creditor or a collector, be polite, contrite and keep the conversation short. Let them know you are aware that you owe them money, and are experiencing some financial hardship and direct them to your settlement company, because they are your agent.
Your credit score will be hurt. However, chances are, your credit is already in pretty rough shape and settling your debt will improve your debt-to-income ratio. That alone will increase your credit score.
After all your debts are settled, you will definitely want to repair your credit. Repairing your credit can be a tedious process, but it can be made easier with the help of a credit repair agency, In short, you will need to obtain your credit reports, scour them for negative or inaccurate items and dispute them. This is a one way to clean your report and to help get good credit back quickly.