Before filing bankruptcy, learn about debt reduction settlements |
By Ryan Levin on November 1, 2011
.jpg.aspx) If you’re heavily into debt with no realistic hope of paying off what you owe, or if you’ve got a lot of debt and recently suffered a hardship that’s going to make it harder to stay on top of payments, you may want to consider seeking a debt reduction settlement.
A debt reduction settlement means that you pay your creditor a single lump-sum payment for less than your total outstanding balance. In exchange, your creditor agrees to completely clear your account and declare your debt either paid in full, or paid at a reduced amount. Either way, if you can make such an agreement, your account is cleared and you no longer owe anything to that creditor.
This is usually only possible if you (or your lawyer) can convince your creditor that you are unlikely ever to pay off the debt in full; if they think that you can keep making payments, they won’t usually offer you a reduction. If they think that you’re on the verge of declaring bankruptcy, though, they’re more likely to offer you a settlement—a reduced payment is better than none at all.
Sometimes, a creditor (a credit card company, for example) will send you letters offering a settlement, especially if you’re behind on payments, falling deep into debt, or if they find out about a hardship you’re undergoing. They’ll typically offer you freedom from debt if you pay them 70%-80% of your outstanding balance.1
If you seek out a better debt reduction settlement by hiring a bankruptcy lawyer or using a debt settlement company, you’ll probably pay 30%-50% of your outstanding balance instead.1 Even with the extra costs associated with hiring a third party, it’s usually a better deal for you to do so, especially if your debt is high.
Be very cautious if you decide to seek a debt settlement company to negotiate for you. Some of them charge up-front fees, even though it’s not guaranteed that they’ll be able to make a settlement. Others charge monthly fees while they negotiate with creditors, which gives them a reason to draw out the process. Make sure that you select a company that doesn’t charge until a settlement is made, and that takes a reasonable percentage of your savings when they do make an agreement.
If you have a good credit score, making a debt reduction settlement will lower it a lot. It won’t do as much damage as declaring bankruptcy, though, and it can be an excellent alternative if it’s done carefully. If your credit score is already terrible, a debt reduction settlement can only help you.
References:
1http://www.debtworkout.com/bad_credit/credit_card/debt_reduction.html
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