It’s a twisting roller coaster no one wants to experience, but unfortunately, a myriad of people bought the tickets. There are many life circumstances that can force you to kneel before the debt.
Either you lose a job or suffer an expensive illness, the bills tend to pile up. By the time you get to stabilize your finances, the calls from debt collectors come like pouring rain.
In such a situation, debt settlement, where creditors settle your debts for less than what you owe, seems like the only way out.
But you should also know that it comes with its own risks such as:
- No guarantee of resolving your debts.
- A long-term hit to your credit score.
It may seem that your finances are beyond repair, but in some cases, opting for debt settlement could be more damaging than saving.
The few scenarios where settlement makes sense includes:
1. One temporary setback
If you’ve left behind on a single credit card, but otherwise stayed put with your bills, then you may get eligible for settlement. Your debt should be at the stage of collection, hinting hardship to the creditor.
2. Tried everything else
If you are struggling to make monthly payments on your outstanding debts, and also don’t qualify for filing bankruptcy.
Do-It-Yourself settlement and risks
If you have made up your mind to settle, negotiate on your own instead of approaching a debt settlement company to negotiate for you, then you’ll require persistence and patience, but you’ll typically reach settlement quicker.
Another thing that you’ll need to have is some cash in hand for the debt settlement option to work. The plans under debt settlement need you to pay your creditor a lump sum amount or call for a payment plan.
Throughout the whole process and until you settle the debt, your credit score will go down. The settlement reflects on your credit report for nearly 7 years, displaying that you paid less than the original amount.
Alternatives to settling
The word of advice is that one should not treat the settlement as a solution for overwhelming debt – the type that keeps you up at night.
For a number of people, Chapter 7 or 13 bankruptcy can prove to be a much faster and less damaging way to counter the debt situation, although it carries a stigma.
According to many people, the option of bankruptcy should be used as a last resort, when it’s actually first resort for people with a grave debt situation.
A debt management plan from a non-profit credit counselor can also give you debt relief.
In order to make debt management plans work, it is necessary to have a steady income. That’s because these plans usually need fixed monthly payments to the creditors for 3 to 5 years.
Both bankruptcy as well as debt management options not only provide you with a fresh start, but you may also have the opportunity to learn about managing your money in a better manner.