If you’ve fallen behind on your credit card or other debt payments, it might feel as though you’ve run out of options for resolving your bad financial situations. Debt settlement, a form of debt relief whereby you pay your creditors a portion of your debt and the creditors discharge the remainder, may be an option for you.
If you’re considering debt settlement, read on to learn about three debt settlement options to determine whether this might prove a feasible way to resolve your own debts.
#1: Negotiate a Debt Settlement on your Own
The first option might be available to you if you are behind on your bills and know there is no foreseeable way to pay them off. In this case, you might decide to reach out to your credit card company (or companies), medical service providers, or debt collectors, as the case may be, and make a settlement offer.
Instead of waiting for a collector to come to you, reach out and offer a lower amount of your outstanding debt balance. Ask if your creditor will be willing to accept this in exchange for discharging the remaining balance.
This option is best for someone who is confident in his or her ability to communicate with and negotiate with the sometimes difficult credit card companies and debt collectors. Furthermore, for this approach to be successful, you must be able to pay the amount you are offering as a settlement. If you do not have the amount available, it is probably better to wait to negotiate a settlement at a future date or follow one of the following two debt settlement options instead.
#2: Enroll in a Debt Settlement Program
A second option is to contact a debt settlement company and enroll in their debt settlement program. Similar to the first option above, the goal is to negotiate with your creditors to accept a lower lump sum in exchange for discharging your debt. However, in this case, a debt settlement company negotiates on your behalf.
Here are the basics of how a debt settlement program works:
1. After consulting with a debt settlement company, you will be advised to stop making payments on your debt. At this point, creditors will likely begin to report your accounts as past due. While this will impact your credit score, it’s nonetheless an important step to resolving your debt.
2. The debt settlement company will negotiate with your creditors on your behalf to agree to a lump-sum payment that you will need to pay in order to discharge your debt. This amount will be lower than the total amount you owe.
3. The debt settlement company will set up an escrow account. Instead of paying your bills, you will deposit cash into this account, which will then be used to pay off your creditors in one lump-sum.
4. When the escrow account reaches the amount your creditors have agreed to accept as payment of your debt, the debt settlement company will transfer that money to your creditors on your behalf in exchange for forgiveness of your total outstanding balance.
5. Your creditors will report these accounts as “paid as agreed.” With your debt resolved, you can take steps to rebuild your credit.
#3: Respond to a Debt Settlement Offer
Sometimes, creditors reach out to you first with a debt settlement offer. This usually happens when your debt is sold to a third-party collection agency. These agencies purchase delinquent accounts from a credit card company for a portion of what is owed and then reach out to the debtor (you) to try to collect as much of the debt as they can.
If you’re considering accepting a settlement offer, make sure you get everything in writing, especially the offer and the terms of the settlement. Further, don’t forget that you can always negotiate in this situation: You don’t need to accept the original offer. In fact, you don’t need to accept the settlement offer at all.
If you decide not to accept the offer (perhaps it is too high and they won’t negotiate lower, or maybe you think you can repay the debt in another way, or at another time), your creditors or the debt collectors will continue to communicate with you and attempt to collect from you.
Whichever form of debt relief you end up pursuing, knowing your debt settlement options, whether it is with the help of a debt settlement company or negotiations on your own, will help you to choose the right solution for you and your debt.