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Debt Consolidation Facts

1. If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will identify you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (Fair Isaac).

2. If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

3. Out of a random sample of 3 million American consumers (included in Experian's National Score Index), 51% of them have at least 2 credit cards and 14% of them have 10 or more credit cards.

A “Settling” Solution for that $50,000 Debt

Okay.  You’re way out on a limb with your credit.  You’ve extended more than you can afford, and you may even be considering bankruptcy.  Don’t do it until you’ve researched all possible solutions, including debt settlement.

What is debt settlement?  In essence, debt settlement is the ability to have your debt negotiated to smaller balances with one much smaller, agreed-upon monthly payment.  This includes unsecured credit only.

Should I consider this solution? 

Under certain circumstances, this solution would work well for you.  If any of the following applies to you, then you should consider debt settlement:

  • If you have not paid payments for the past three months.
  • Debt consolidation, which is distinctly different than a debt settlement, won’t work for you.
  • You’ve lost your job or are experiencing a medical emergency.
  • Your creditors are threatening law suits.
  • You are receiving harassing phone calls from collection agencies that purchased your debt.

Video: Suze Orman - Is Debt Consolidation a Scam?

pay off debtHow does debt settlement work? 

What is unique about debt settlement is that you can do it yourself or enlist the assistance of a business to do it for you.  Many end up hiring a debt settlement company.  If you do, make sure you request all their fees in writing before signing a contract with them.  The focus and goal is for them to negotiate each of your credit card balances to a much smaller amount, usually 35% to 60%, and to decide on a single, agreed-upon payment for the remaining balances that will satisfy you and all your creditors.  As with all things financial, you’ll want to consider the advantages and disadvantages of a debt settlement.

  • Advantages – Your debt is significantly reduced, so it takes less time to pay it off.  You make one lump sum payment, and your payment is lower than what you used to pay your creditors.  You pay the one lump sum payment to your debt settlement company, and they pay the payments to your creditors.  No additional late fees or over-the-limit fees are accrued.  This stops the harassing collection calls for good, as long as you make your payments, and make them on time.  Your creditors typically stop all collection efforts once you’ve signed a debt settlement agreement.  If your debt settlement company negotiates with your creditors to report your on-time payments to credit reporting agencies, your credit score will improve over time.
  • Disadvantages – Your credit score can be further tarnished, since you must stop making all payments to your credit companies until a settlement is negotiated.  You may also be required to pay tax on the “forgiven” amount– e.g., your debt is reduced from $20,000 to $10,000.  The 50% reduced, or “forgiven,” may now be taxed as income by the IRS.

What is included in a debt settlement? 

All unsecured debt should be included in debt settlement; however, secured debt, like mortgages, car loans, child support, utility bills and government-backed student loans cannot be included.  Below is a more exhaustive list of unsecured debt that should be included in debt settlement:

  • Credit cards
  • Medical bills
  • Payday advances
  • School loans
  • Personal loans
  • Accounts that have been referred to collection agencies
  • Department store cards

Video: Credit Counseling or Debt Settlement?

What about a new loan, instead? 

calculatorAt this point, you may be tempted to consolidate your debts into a new loan, even if you are eligible for debt settlement.  You would, most likely, have to take out a second mortgage on your home, or obtain a home equity loan to pay off the debt.  You will want to understand the advantages and disadvantages in making this decision.

  • Advantages – Your creditors stop calling and harassing you.  You make one small payment instead of many larger payments.  Your interest rate is lowered.  That’s it.
  • Disadvantages – There are many disadvantages to a debt consolidation loan.  You pay the full amount owed on each of your debts, including late fees and over-the-limit fees.  Due to the total amount financed, it may take longer for your debt to be paid off.  If you choose to pay your new loan off over the life of the mortgage, you’ll have paid around two or three times the amount of your original debt once it is paid off.  Your unsecured debt has now become secured debt by attaching it to your home.  Bottom line?  Your home is now a target for foreclosure if you ever become unable to make your payments. 

Contrary to a new loan, debt settlement will not put your home in the line of fire for repossession if you are not able to make the payments. How you can get someone to pay off your $50,000 debt?  Hire a debt settlement company to negotiate your debt down to a significantly reduced amount with only one low monthly payment.  It’s that simple.