Think of debt settlement as getting the cake and eating it too… just not all of it.
It’s a negotiation process by which you secure debt collection at the cost of lower final payment.
But, understanding debt settlement can help you recover a significant amount of what debtors owe you.
Most debtors are looking for a way to get a debt clearance, and debt settlement is one of the best ways to do it as they can negotiate with lenders and settle a debt for a reasonable amount of what they owe.
Still not entirely sure? Continue reading.
What is Debt Settlement?
Debt settlement is a negotiation process between a creditor and a borrower. The two parties negotiate on the amount of money the borrower should pay for their loan to be considered fully paid.
In simpler terms, debt settlement is a debt reduction agreement reached by a borrower and their creditor. The creditor usually accepts a reduced payment that the borrower has to pay. The creditor then regards this reduced payment as full payment.
So, what is a debt settlement plan?
A debt settlement is a plan that typically involves agreeing on how your borrower will settle the amount you have decided on during debt settlement negotiations. Borrowers can pay this amount in a series of installments or as a lump sum debt settlement.
A consumer debt settlement plan arises when borrowers have many late or skipped payments, and you’ve reached an agreement with them on a reduced amount.
How Debt Settlement Works
A borrower enters into a debt settlement arrangement when they cannot pay their outstanding debt to you. The borrower may engage you directly, or they may hire a debt settlement company to act on their behalf.
Typically, the debt settlement process is as follows:
- The borrower explains their financial predicament to a debt settlement company.
- The debt settlement agency advises the borrower to make payments to them instead of their creditors.
- The debt settlement company puts the payments into a savings account.
- The settlement company contacts their client’s creditor to negotiate a debt settlement once the money in the savings account reaches a certain amount.
- If the negotiations are successful, the settlement agency takes a cut of the money as their fee. It distributes the rest to its client’s creditors.
Risks and Benefits of Debt Settlement
Debt settlement appeals to creditors who want to recover some of the money they are owed and borrowers who want to come out of debt.
Benefits to creditors
- Debt settlement can help you recover some of the money from your debtors rather than losing all of it.
- It can save you time and money that you would have spent collecting the debt.
Benefits for borrowers
- Debt settlement can save borrowers a significant amount of money.
- It enables borrowers to get out of debt much faster.
- Working with a debt settlement agency simplifies repayment.
Risks to borrowers
However, the arrangement also involves some risks:
- Negotiation hurdles – The creditor may reject a debtor’s settlement offer, and borrowers may need to submit a counter-offer.
- Increased debt – Fees paid to a settlement company could increase a large amount of money to the borrower’s debt.
- Drop-in credit score – A debt settlement will cause your credit score to drop, and the damage could last for at least seven years.
Debt Settlement vs. Bankruptcy
Debt settlement involves borrowers negotiating to pay a lower amount than they owe. In contrast to debt settlement which we elaborated on, bankruptcy involves borrowers asking for their debt to be discharged.
While it may seem tempting at first as it’s the fastest means of getting out of debt, it has a significant, long-term, negative impact on creditworthiness. But, which is the better option for the debtor?
Bankruptcy offers debtors the fastest means out of debt, but its long-term negative impact on creditworthiness is significant. On the other hand, debt settlement allows creditors to make less payment than their debt in one lump sum, and its effects are not as long-lasting.
One of the good things about bankruptcy is that you will be protected from debtors who can no longer abuse you to pay. However, your mortgage rate will be severely damaged, and you may not be able to get a mortgage on loans, apartments, or mortgages for up to 10 years.
One of the negatives of debt settlement is that you’ll have to pay a sizable fee to your debt settlement company and taxes on the amount forgiven.
Are There Alternatives to Debt Settlement?
Before considering debt settlement, debtors can try any of the following alternatives to settle their debts:
Negotiating with creditors: Borrowers can engage your creditors directly and negotiate for lower interest rates.
Getting advice on their budget plan: Debtors can get advice on managing their budget and making their payments from a credit counselor.
Using a debt management plan: A good candidate debtor can sign up for a debt management plan. These plans can help borrowers pay off debt quicker by working with creditors to lower interest rates.
Before even mentioning debt negotiation services, your debt settlement expert will want to know your lender. They will also need to know how much you owe them and who, if any, debt collectors have been contacting you.
As it turns out, most lenders only resort to debt collectors when they can no longer get in contact with you. Rather than dealing with the collector, however, a debt settlement expert will work with the lender directly.
The downside to this move is that using a debt collector to get your money costs lenders an additional fee. Settlement experts know lenders want to avoid that additional fee and will call them directly to sort out the situation, saving both you and the company money.
Suppose they have a proven track record of helping consumers settle their longstanding debts. In that case, they also have a proven record of making sure lenders get the money they are after.
Whether you went through a divorce or the person who earned most of the money in your home suddenly passed away, or you were laid off, your negotiator will ensure the lender knows how bad you are struggling but genuinely want to pay the company what you can.
A debt settlement is only available if you are not making payments to your lender, usually three to six months. The best debt settlement companies will not be willing to take the first counter-offer a lender provides them.
Before even making an offer to your lender, they will sit down with you, look at your debts, income, and budget to help you come up with various payments and lump sums to pay your lender that are affordable.
The settlement agency will also make sure to determine the optimum amount you can reasonably and definitively pay during a settlement.
There is also the agreement that you will make your payment to the lending company itself and not a debt collector if one has been assigned to your case.
When to Get Professional Help
Handling debt settlement negotiations can be difficult and time-consuming. A skilled debt collection attorney can handle the negotiations and ensure that you recover as much as possible. Most borrowers hire professionals to manage their debt settlement, and so should you.
Get in Touch With Hanna & Jarbo
If you don’t reach a debt settlement agreement with the borrower, you might have to file a lawsuit to recover your money. Generally, the suit will aim to prove to the court that the debtor breached their contract by failing to pay you.
As in all lawsuits, the defendant (the borrower) has a legal right to explain why the alleged breach is not a contract breach or why the breach should be excused. You will need an excellent attorney to help you handle the technicalities in court to increase your chances of recovering the debt.
At Hanna & Jarbo, we pride ourselves on achieving debt collection 85% in every case. We are the best debt collector lawyers in the Midwest. Contact us to collect what is lawfully yours.
Specialty practice areas
- Returned checks
- Construction debts
- Supplier Account Receivables
- Auto loan and deficiencies
- Landlord-Tenant Debt & Money Judgments
- Charged-off or non-paying commercial credit portfolios
- General loans, notes, and credit lines in default
- Secured and unsecured judgments or liens
- Foreign (non-Michigan) judgments
- Mortgage/Land Contract deficiencies
- Other commercial paper receivables
What Does Working With Us Look Like?
Working with us involves three easy steps:
Set up a free consultation call. We’ll explain all you need to know about debt collection and the options available to you.
Give us your debtor’s information. This includes invoices, IOUs, leases, or promissory notes, or whatever you’ve got. This will help us determine what to collect.
Sit back and relax. You don’t have to do anything further while we track down and collect your debt. We’ll do whatever is necessary to get your money back.
Here Is Why You Should Work With Us
Our services are hands-off – Hanna & Jarbo will take care of everything, A to Z, so that you can take care of other important business.
High success rate – Hanna & Jarbo achieves 85% of debt collection in every case. You won’t find better debt collection services anywhere in the Midwest.
We do things right the first time – We strive to do everything right from the moment you hire us. We adhere to the guidelines set out by the FDCPA when collecting your debts.
It will save you money – Engaging us won’t be too expensive since we don’t charge out of pocket, only on debts recovered.
Contact us today to start collecting unpaid debts & recovering money that’s rightfully yours.