Mansi Gupta asked:

 

Debt settlement has quickly become one of the preferred methods of reducing credit card debt and starting a new financial future that is free of the vicious cycle that credit card debt problems create! Why has debt settlement become so popular lately? The benefits of a debt settlement program can probably best be illustrated by comparing it to the other options available to consumers caught in the mounting credit card debt nightmare. This information is intended to give you some insight into why people often choose debt settlement programs over the other, previously more “tried and true” methods of debt reduction out there.

 

Debt Settlement or Consumer Credit Counseling: The most familiar debt reduction concept for the past couple decades has been the consumer credit counseling method. Consumer credit counseling plans are designed to insure a full payback of the unsecured debt owed to the creditors, as well as any interest that has been accruing. These organizations are non profit agencies, and qualify as such for certain federal exemptions based on their non profit classification. They are funded in a large part by the creditors in the form of “donations”. A consumer credit counseling agency will set up a debt management plan (DMP) that they feel offers significant interest savings, and a repayment time frame of around 5 years. All of your unsecured monthly creditor payments are consolidated into one payment that you make directly to this counseling agency. They in turn, distribute your monthly payment to the respective creditors. In contrast to a debt settlement program, a DMP requires you pay the full debt back and any accrued interest charges. Therefore, you are paying significantly more than in a debt settlement program where your credit card debt balances are settled for less than the full amount due. Because a DMP is designed to remit the full unsecured debt and accruing interest charges, the monthly commitment amount is typically much higher, and may still not provide any “breathing room” to a consumer who has already been under a prolonged period of extreme financial stress. Any debt reduction program requiring a longer timeframe to complete seems less attractive as a solution.

 

Debt Settlement or Debt Consolidation Loans: A debt consolidation loan is not actually a method of reducing unsecured credit card debt problems but rather trading “unsecured debt” for “secured debt”. Debt consolidation loans are a well known debt management option. However, there is a risk involved as collateral is almost always required to secure a favorable interest rate for a debt consolidation loan. Not surprisingly, that collateral is typically your home/residence, and your unsecured debts are essentially converted into secured debt through the loan process. This form of managing a credit card debt problem is highly risky. Whatever placed you in the financial difficulties you now face (job loss, illness, family matters) could occur again in your future. But the next time, you may not default on your monthly payments are you could lose your home. Exercise extreme caution when opting for a debt consolidation loan in lieu of a debt settlement program.

 

Debt Settlement or Bankruptcy: If you have been under severe financial pressure for an extended period of time, filing bankruptcy and hopefully walking away from the financial nightmare may look quite appealing. A bankruptcy discharge of all your unsecured certainly can give the illusion of wiping the slate clean and starting fresh. But is that what really happens for your financial future? Filing bankruptcy does have consequences that are far reaching. A bankruptcy filing remains on your credit history for up to 10 years and can impede you from qualifying for future home or auto loans. Should you be able to qualify for a home or vehicle loan, it is doubtful it will be at an attractive rate of interest. You are deemed to be a credit risk after a bankruptcy discharge. Additionally, many employers screen their most serious applicants by requiring a credit report. Wouldn’t it be a shame to lose a potential position because your bankruptcy discharge made you less desirable than the other employment candidates in the running for the terrific job? This risk is quite real and merits some careful consideration before you select filing bankruptcy instead of attempting to succeed at a debt settlement plan.

 

In general, investigating all your debt reduction options while objectively and carefully weighing the benefits and the consequences of each, should help you reach the best financial decision for you and your family.

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Mansi Gupta asked:

 

Many people who select a debt settlement program may have already tried credit card consolidation in an effort to resolve their financial difficulties, but may not have been satisfied with the arrangements or the amount of time it was taking to pay off what they owed. For these individuals, debt settlement may provide a faster way to eliminate their debts for the least possible amount of money, while avoiding bankruptcy court. It has quickly become one of the preferred debt remedy solutions.

 

 

The process of debt settlement or credit card debt settlement involves negotiating a lower payoff amount to resolve the outstanding debt owed to a creditor. Typically, debt settlement should be considered a course of action only for those individuals under extreme financial distress, who are having difficulty meeting even basic financial obligations.

 

 

When considering debt settlement as an option for reducing credit card debt, remember that there is no guarantee that an original creditor or even a collector will settle for less than the full amount owed. Some attorneys acting as collectors may be particularly difficult to settle with. Larger collection agencies are often easier to negotiate a reduced settlement with.

 

 

There are many reasons to try to settle your debts through debt settlement. There are also many reasons not to go this route for your debt remedy solution. To make sure you are prepared for what may come, here are some of the “pros” and the “cons” of credit card debt settlement. Remember that the more you know before you start this process, the better off you will be.

 

The “Pros”

? You may be able to settle your credit card debts for pennies on the dollar, potentially saving you thousands of dollars in the long run.

 

? Your unsecured debts may be resolved within months or even a few years, freeing up your cash flow much more quickly than long-term credit card consolidation programs.

 

? The monthly commitment amount designed by debt settlement services is almost always significantly less than credit counseling debt management programs, and debt consolidation loan payments. This gives you much needed breathing room for household and fixed obligation expenditures.

 

? The credit card debt settlement process, as such, will not appear on your credit record, and your accounts will eventually be marked as “paid” or “settled.” (See the “cons” for the other side of this coin.)

? The effects of settlements on your credit rating/FICO score will drop off more quickly than a bankruptcy would (a bankruptcy discharge remains on your credit report for up to 10 years).

The “Cons”

? While your payments are being withheld from the creditors, you may receive harassing calls from your creditors and collection agencies. The debt settlement company may request creditors to stop calling, but that does not mean they will honor those requests.

 

? Late fees will continue to accrue on your unpaid accounts, piling up and increasing your total amount due. Should your creditors refuse to play the game, you could find yourself in an even greater financial mess than you started with.

 

? It is possible that your settled debts may be noted on your credit report as “settled” or “settled for partial” rather than “paid in full” which is the most desirable credit report notation.

 

? Any savings off the total amount due is reportable to the Internal Revenue Service (IRS) as forgiven debt, which is considered a form of income.

 

 

It’s usually better to try resolving your own financial issues before opting for a credit card debt settlement program that will likely add further damage to your credit history. There are ways to embark upon your own debt remedy solution without having to contract a professional debt service. However, every individual’s financial situation is unique as are the circumstances that created the financial problems. Only you know the details of your financial dilemma and what progress is possible to achieve on your own.

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