The debt situation in the U.S. today is worrying. According to the U.S. Census Bureau and the Federal Reserve data, the average American credit debt is $3,600. For families, the average debt is around $16,061, which is close to the situation in 2008.
This comes against the backdrop of the increasing cost of living. While incomes have been increasing, the rate is not enough to keep up with financial obligations. This means more people are expected to fall into debt.
For businesses, the situation is also the same and this has led to the collapse of many small and medium-sized enterprises (SMEs). A 2014 Fortune Report highlights cash flow as the main problem leading to the collapse of small businesses. These sentiments are also supported by the U.S. Small Business Administration (SBA) which says debt servicing takes up a large chunk of revenues generated by the businesses.
In the current financial environment, things are not expected to improve and this is one reason why consumers need to find a way to deal with debts. While there are many financial strategies to help deal with multiple loans, most consumers are not able to leverage them due to a lack of necessary information. Still, others are duped into debt relief programs which end up throwing them deeper into the debt abyss.
One of the most common solutions to debt is debt settlement. This is one of the best-known financial solutions, probably because it is heavily advertised on both traditional and digital media platforms. Before determining whether to go for debt settlement, it is crucial to get more insight into this financial strategy.
Below are some highlights to demystify debt settlement to help you make a better financial decision:
The Basics of Debt Settlement
What is debt settlement anyway? Is a debt consolidation meaning the same as a debt settlement? These are questions consumers ask but in most cases, they are in a great rush to find the right answers. In the simplest manner, debt settlement involves negotiations with your creditor for a lower payment of the owed amount.
In an ideal situation, you will find a debt settlement company with vast experience in the industry to act on your behalf. This means you will not be involved in the negotiations but the debt settlement company will be working for you. In the agreement, the creditor will agree to a lump sum to be paid by the company.
For this to work, you will open an account with the company from which they will pay your creditor’s agreed amounts. In essence, your creditors will be convinced to take the one-off lump sum which is lower than what they would have gotten from you if you were to repay the loan for the full term.
The agreement will be between the creditor and collection agency or credit card company, but the bottom line is that the amount you will pay will be lower. The negotiation skills of your debt settlement company will come in handy to ensure you get the best deal. In turn, you will pay a commission or fee for the service.
Advantages of Debt Settlement
When searching for a financial solution to your debts, make sure the option you settle for does not lead to more problems. It is important to appreciate that every debt solution cannot apply to your case, hence the need to talk to a financial expert who is well-versed in the options available.
For debt settlement, there are several advantages including:
- Lower single payment – Once your payments to the credit agency are enough to make the agreed lump sum to your creditor, you will not have to worry about the debt again. This is a win-win situation for both the creditor and the debtor. You have peace of mind once the debt is paid and the creditor does not have to incur extra costs trying to pursue payment.
- Better control of your finances – Handling multiple loans is a tough task, especially when you still have other financial obligations to meet. By settling the larger debts first, you will have more control over your finances. It is easier to budget when you don’t have bills hanging over your head.
- Avoid bankruptcy or loss of your investment – Bankruptcy is the worst thing anyone has to go through. It impacts generations to come and leads to myriad missed opportunities in life. Debt settlement can save you from this agony and prevent the loss of your business assets.
Drawbacks of Debt Settlement
While debt settlement is ideal for those with very poor credit scores, it can also affect you negatively. As such, you need to understand the drawbacks in order to make an informed decision.
Below are some of the expected drawbacks:
- Damage to your credit scores – Once you have repaid your pending debts, this information is reflected in your credit report. The credit card company or other creditors whom you have repaid will report this as a settled amount for less than agreed. In essence, your credit card will be damaged for 7 years.
- Constant collection calls – In most cases, debt settlement companies will advise you to ignore both the creditors and collection agencies. The idea here is to force them to eventually agree to any amount they put on the table. This not only ruins your credit score further but also puts you at risk of legal action.
- Unclear payments – A debt settlement company might not reveal exactly how much money is going to debt repayment and what is going to their fee payment.
To avoid being scammed, take the time to do background checks on any company that you want to use. Avoid any agent who contacts you without your prompting and make sure any agreements that you are about to sign are fully understood.
It is also advisable to check the reputation of the debt settlement company through the Better Business Bureau (BBB), online reviews, and by seeking referrals from other clients.
If you are looking for a solution to ballooning debts, you can opt for a not-for-profit Debt Management Program (DMP) or Online Las Vegas consolidating companies. In loan consolidation, you will have an easier single repayment to deal with after settling all the other debts while a DMP’s focus is to see you get out of debt fast.