What is a Debt Settlement?

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A debt settlement can lead to a judgment against you.

Debt settlement is typically a lump sum payment to pay off an outstanding debt. This is paid either by a debt consolidation loan or negotiated by a debt settlement company. Some people, however, have found success with debt relief options. Here’s a look at the three.

1. Debt Consolidation (Settlement) Loan

To qualify for this you’ll need to have a good credit report, credit rating score, and a history of paying off your debts in a timely fashion. The banks, regardless if you like them or not, still typically offer the best rates.

Folks with credit scores lower than 600 will be charged with higher rates. The higher your score, the lower your interest rate. If you have terrible credit then you should know that you’re going to be offered a higher rate. Just so you know, in Canada, a 59.8% interest rate loan is legal.

Is a High Interest Loan Good For You?

It depends on your situation. You’ll need to ask yourself how long you’ll want to do this for? What would you like to buy eventually? I can’t count how many people wanted to buy a home within 1-2 years but they had bad credit. Cut your losses, make a plan, be realistic, look at your other options.

2. Debt Settlement Company (Debt Collector)

Debt settlement companies try to negotiate on your behalf to your creditor. They negotiate with a lump sum payment from you. The amount is supposed to be less than your outstanding debt. Unfortunately, not all debt settlement companies operate honestly. In some cases, a debt collector will say that they are a debt settlement company.

Debt Settlement Company Issues

Consumers, who do debt settlements, are often required to pay excessive, largely non-refundable fees up-front. They are also encouraged to stop paying their debts and instead save up for a lump-sum settlement.

Many people are unable to save enough for the lump-sum settlement amount and subsequently ‘drop out’ of the program, losing any money they have already paid to the debt settlement company. There is no guarantee a creditor will accept the lump-sum settlement, although this risk is often not communicated to consumers. This can further accumulate debt, as late fees, missed payments, and penalties build up.

My Client’s Court Appearance

Here’s the worst case scenario: A former client of mine went to a high-interest lender, pulled out as much money as she could, paid her debt settlement company, and was told to wait. Phone calls & legal letters started coming in from all of her creditors. Concerned, she called her debt settlement company who said to ignore them and not contact anyone. A letter appears in the mail asking for her appearance in court. She called me because her debt settlement company wasn’t returning her calls anymore.

Fortunately, I was able to help at this point even though she lost her initial fee to the debt settlement company.

3. Debt Relief Options

When you’re already behind on your payments and your credit is bad then it’s time to start looking at debt reduction and interest relief.

First of all, when everything is complete the calls & letters will stop.

Second, this is what to do when lending options are too expensive.  Insolvency programs can help to reduce your debt by more than 50%. I’ve seen some debt reduction go to 80%!

Third, the payments back to all of your lenders are affordable. Insolvency programs were created by the government because “life happens” and you can finally pay off all of your debt with dignity.

The Case for Debt Settlement

In summary, it’s best to look at your options to see what makes the most sense. If your credit report is decent then I’d recommend going to a bank for a debt consolidation loan to pay off your balance. In the case of debt settlement, you’ll need to do your homework. Surprisingly my client’s company was a well-known brand so be careful! If your credit is in pretty rough shape then try debt relief options.

 

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