If you find yourself deep in debt and struggling to make your repayments yet you are able to come up with a lump sum of money, debt settlement may be an option for you. Debt settlement is an informal arrangement with your creditors that allows you to pay a lump sum, that’s typically less than the full amount you owe, in order to wipe out the debt completely (settling your debt). This means that you can rest easy knowing you no longer need to keep paying back your debt.
Debt settlement is paying back a portion of your debt in one lump sum, while the remainder of the debt is forgiven.
How does Debt Settlement work?
If you’re struggling to meet your minimum repayments due to financial hardship, such as a sudden job loss, divorce or unexpected medical expense, but you do have access to a lump sum of money, then you might want to consider debt settlement. If you have recently received a lump sum of money such as a redundancy, insurance pay out, divorce proceedings, the sale of goods you no longer need, an inheritance, a second job or even a lottery win, you can negotiate with your creditor to use this money to settle your debt – even if the lump sum is less than the total debt owed.
For example, you might owe $10,000 on your credit card and your creditor is willing to accept 40c in the dollar, you will only need to pay them back $4,000 in a lump sum and your debt with them is settled. This will save you $6,000, plus any additional interest payments and late fees you would have had to have paid – this is only an example, every person’s situation is different and every financial institution will have different expectation of what they will accept.
Fix Bad Credit will assess your specific financial situation, and on your behalf, will negotiate with your creditor to get the best outcome for your financial future. The most common kind of debt that is settled is unsecured debt—money owed on credit cards, store cards, personal loans and larger phone and utility bills. This kind of debt doesn’t have property or other assets secured against it. Whereas, secured debt is usually associated with home mortgages and car loans, where the creditor is more likely to repossess a house or a car than accept a payment for less than the debt is worth.
Why would a creditor be interested in debt settlement?
There is a well-known proverb ‘A bird in the hand is worth two in the bush’, meaning it’s usually better to hold on to what you have rather than take the risk of letting it go in order to chase after something better that you might not get. When we talk about this in terms of debt settlement, this means that many creditors are willing to take a lump sum of money to cover your debt even if it does not meet the full amount owed, rather than taking a chance on payments that might not come.
When personal debt becomes unmanageable, there are a number of options available. Some of the options, such as a Part IX or X Debt Agreement, or Bankruptcy, will result in the creditor receiving only cents in the dollar of what they are owed, or in the case of bankruptcy, sometimes nothing. On top of this they have additional administration costs, the time they have spent trying to get their money back, and any interest repayments they may have themselves for the money they lent you.
So, if you simply can’t repay what you owe and your only solution is bankruptcy, for example, the creditor won’t be able to recover what they are owed. However, if the debt is negotiated and settled for a lesser amount, at least they will get back some of what is owed to them. When a creditor becomes aware of your inability to pay back your debt, and they may be exposed to the risk of not receiving what they are owed, then it’s in their best interest to protect their bottom line by accepting as much as they can, even if it is not the full amount.
Why should you consider debt settlement?
Debt settlement can give you some relief and shorten the road to rebuilding your credit. However, debt settlement may also negatively impact your credit score and credit report, so be sure to understand how it works and the pros and cons before proceeding.
With a debt settlement you can:
- Settle an outstanding amount of debt owed to a creditor for less than what is owed.
- Clear the debt with one single payment, so you can rest easy knowing you no longer owe your creditor money.
- Potentially save thousands of dollars, getting you closer to a financially secure future.
What are the advantages of debt settlement?
Here are some advantages to debt settlement:
- The total debt you pay back is reduced – you pay a portion of what’s owed, with the remainder of the debt being forgiven.
- Reduced anxiety – debt settlement means you no longer need to feel anxious each month when your payments are due.
- No more annoying stressful calls from creditors – by entering into an arrangement to pay off what is owed, debt settlement means no more annoying and stressful phone calls, emails or letters from creditors or debt collection agencies.
- No more threat of bankruptcy – debt settlement eliminates your creditor escalating your debt situation to legal or court action, such as forced bankruptcy.
- Fix Bad Credit – debt settlement allows you to get out of debt faster than if you just continued being late with your payments, or missing them entirely – which can have can have a positive long-term impact on your credit score, allowing you to get back to living your best life faster.
What are the disadvantages of debt settlement?
It’s important to fully understand what the debt settlement process involves and what you’re signing up for. Some of the disadvantages of debt settlement include:
- There is no guarantee that a debt settlement will be accepted. Each credit provider will have their own individual measures for evaluating what’s best for them. What may work for one creditor may not work for another and not all accept debt settlements as an option to pay back your debt
- Depending on the size of the debt, you often need a substantial lump sum of money.
- Debt settlement can negatively impact your credit score during the negotiation process if you stop making payments before anything is agreed
- Accounts marked as settled on your credit report can have a negative impact on your credit score if this is not addressed during the negotiation process
- Debt settlement negotiation can be a difficult and stressful process, especially if you are attempting it yourself
- You may need to pay late fees or interest if these are not frozen during the negotiation process
Going it alone? What’s the key to successful debt settlement?
The key to a successful debt settlement is without a doubt the negotiation process. See Fix Bad Credit’s Debt Negotiation page for more information.
Preparation is key. That all starts with having a well-detailed and comprehensive understanding of your current financial situation, including what you can, or can’t afford to pay back as a lump sum.
Any kind of debt negotiation is most successful when you are suffering from a genuine financial hardship situation – job loss, unexpected medical expensive or illness, divorce or death in the family. As well, credit card providers, for example, are not going to take too kindly to a debt negotiation to pay back a maxed out credit card if your recent statement displays that you have been using the credit card to acquire luxury items, overseas holidays, weekends at hotels, dinners, extravagant entertainment, presents and gifts.
However, if you can demonstrate that you’ve only used it for the necessities in life, then there is the likelihood that they will be far more understanding, and willing to work with you to achieve an outcome that’s in the best interest of both parties.
Creditors willing to settle a debt usually only do so on the basis that a lump sum will be paid. Receiving a lump sum now rather than having to wait potentially years to receive what they are owed is a big motivating factor for creditors to negotiate on this basis. During a debt settlement negotiation, the borrower will usually offer a lump sum now, smaller than the full amount owed, in return for the creditor considering the account ‘settled,’ thus removing any further debt repayment obligations. The debt negotiation process can be a lengthy and stressful one, and you will normally continue to pay what you can towards your debts while negotiating, although some debt negotiators may advise you to stop making payments.
As always, we strongly recommend that with any agreement, or in any negotiation, be certain to get all details finalised in writing. It is not unheard of for a creditor to verbally agree to a debt settlement, then the creditor turns the remaining balance over to a debt collection agency. A few months go past, and the borrower is enjoying their debt free life, and they receive a phone call from a debt collection agency asking how they intend to pay off the outstanding amount.
So be certain that the agreement is in writing, that it is very clear, and is exactly what you believed it to be, with any fees clearly listed and that it excuses you from any further payment to the creditor for that particular debt. The team at Fix Bad Credit are well versed in the legislation, and compliance that a credit provider must adhere to.
Our team of legal experts identify areas where the credit provider may have breached its legal obligation, and use that as leverage to get the best possible outcome for our clients during the Debt Settlement negotiation process. With years of experience in the industry, we will achieve an outcome that’s best for you, allowing you to get on with living a debt free life.