Debt Settlement: Step 1: Establish Reasonable, Realistic Goals

Debt settlement doesn’t happen overnight necessarily. Many people assume that their first phone call to the collection agency will leave both parties satisfied and debts written off right away. Yet often times it takes up to five years to finally settle the score! If you try to negotiate directly with the collectors, you’ll find they put an exceedingly high amount of pressure on you to pay -- in full, immediately. If you go through a debt settlement company, you’ll have more time to work with and more room to breathe. Understand that your credit will be somewhat damaged for the next few years and the settlement won’t drop off entirely for six years.

Before phoning to make an agreement, subtract your fixed expenses (housing, utilities, food, and transportation) from your monthly income so you know how much money you have to work with each month. Don’t settle for more than you can afford!

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Step 2: Choose the Right Time

Many people feel bullied by collectors and pressured to settle right then and there to put the debt behind them. However, collection agency insiders confess they’re more likely to give a better deal at the end of the month, once their quotas have been satisfied.

Additionally, you’ll want to be sure it’s a good time for you. Before trying to negotiate, save up a substantial amount of money. Many debt collectors will agree to settle for a lesser amount if you pledge one or two lump sum payments. You may have to make a few sacrifices for those two months, but think of how nice it’ll be to have that monkey off your back!

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Step 3: Determine Which Assets Stay and What Goes

The good news about debt settlement is that you don’t have to really wrack your brain over what assets to sell and which assets to keep. As opposed to bankruptcy where you turn over many of your personal belongings to a trustee, who may sell off any non-primary vehicles, boats, motorcycles, antiques, jewelry and other lavish items you may own. With debt settlement, you can technically keep everything you own.

However, many people decide to sell off some of their items to make quick cash for their settlement. Round up any old or unused clothing to take to a consignment shop or sell them online at Plato’s Closet. Check out sites like eBay and Craigslist to sell everything from furniture, books and clothing to cars, stereo equipment and old video games. Gazelle is another site that will pay cash for used electronics like camcorders, laptops and cell phones (paying out an average of $115 per customer). Take an honest look at your life and downsize.

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Step 4: Change Your Lifestyle

You may not have to eat macaroni and cheese for dinner every night, sell off all your furniture or resort to singing songs on the streets for money, but you will have to make some fundamental lifestyle changes to settle your debts once and for all. What good is paying off today’s debt if you’re poised to fall into the same trap within the next year?

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One of the best changes you can put in place is to make your purchases with cash. It’s too easy to rack up the bills with a credit card. However, if you pledge to only spend $100/week on things like gas, coffee, lunch and wants and you set aside that money in your wallet, you’ll be able to monitor your spending better. You might think twice before making your purchases once you see how quickly your bugdet goes!

Next, you must separate “wants” from “needs” and stop telling yourself that you deserve whatever you so desire. If you can survive without it, it’s a “want.” Basic clothing, shelter, utilities, food and transportation are all needs that help you function day to day. It may sound like a drag, but until you save up a $1,000 cash reserve, you really can’t afford to throw money at mere wants right now. Some financial advisors recommend socking away $20/week for fun – whether it is a baseball game, a night at the movies, thrift store shopping or breakfast at a diner – choose something to make you feel good without spending overboard.

On your needs list, investigate ways to decrease your spending in these areas, if possible. If you hardly ever watch television, consider dropping your cable package and rent movies or watch TV shows online instead. You may also consider getting rid of all the extra phone features like three-way calling and voicemail or bundling your services together to save money on utilities. Be energy conscious and unplug all appliances that are not in use, shut off all lights when you’re not in the room and run your dishwasher on eco-wash. Consider getting a free home energy audit to see where you can save. At the grocery store, shop with a list at a supermarket (rather than a convenience store), bring coupons and shop based on the sales. To save on prescription drugs, try a place like Walmart or Target, which offer $4 monthly or $10 90-day supplies of a number of popular medications.

Interesting Debt Settlement Statistics and Facts

On average, it takes between 18 – 48 months to settle a debt.

You’ll need a lump sum of cash right away to make a settlement offer.

Better deals are usually given at the end of the month.

You’re legally entitled to a letter verifying your debt before you make any payments.
A debt settlement will show up on your credit report that it was “settled for less than the full amount.”

Debt settlement is better than bankruptcy because it’s off your credit report within 6 years maximum, compared to 10 years for bankruptcy.

Debt settlement reduces your overall debt, while debt consolidation transfers your debt to one simplified account.

Debt settlement will not work if you continue using your credit cards for purchases.

Most people pay 30 – 45% of the total amount owed when they go through debt settlement.

You may end up paying taxes on the money you didn’t pay back if it exceeds $600, which the government considers “a gift.”