Debt Settlement Pros and Cons: 3 Things You Need to Know

Introduction

Debt settlement is an individual or service that helps individuals achieve debt freedom by negotiating structured and lump-sum settlements directly with creditors. Debt settlement can be a very important way to get out of debt for those who are in the following situations:

1) Have income, but current monthly payments are unaffordable due to a variety of reasons including, but not limited to interest rate increases, minimum monthly payment increases, and promotional APR expiration.

2) Experienced a financial or unexpected hardship such as medical challenges, divorce, unexpected loss of income, or lawsuit.

There are certain pros and cons of debt settlement that you need to be aware of before signing up for a debt settlement program. As such, it’s important to know the exhaustive list of pros and cons to help you make the most informed decision.

Debt Settlement: An individual or service that negotiates your debts by decreasing what is owed if you are unable to afford your debt. Debt settlement is a form of debt relief.

This article is quite long, so I wanted to include the video we recently shot covering what you really need to know about debt settlement. We make a lot of content covering debt settlement, so check out our playlist for a lot of relevant content.

How Debt Settlement Works

Debt settlement companies similarly work as an intermediary for those in debt and the creditor. The debt settlement company will do the following for the enrolled participant:

1. Create an enrollee-owned escrow bank account for the enrollee to consolidate all of the payments into one payment for the creditors.

2. Communicate to the creditors that they are the primary point of contact going forward to prevent future debt-collection calls to the enrollee.

3. Negotiate on behalf of the enrollee with each of the creditors for the lowest possible rate based on financial hardship.

4. Get consent from the enrollee on whether to accept the settlement and payment plan.

5. Manage all of the payments to the creditors until the debt has been completely resolved.

What Should I Look for in a Debt Settlement Provider?

There is a plethora of debt settlement companies to choose from. Although most of them provide a free consultation, promise you to reduce what you owe, and promise you to be debt free faster, there are many points to consider:

1) KNOW THE FEES: I cannot stress this enough. Debt settlement companies have been known to improperly disclose fees. Therefore, it's imperative to know all the fees before you sign. You can save a lot of money and get out of debt, but high program fees can really eat away from your savings.

Does the company charge program fees BEFORE you reach a settlement? This is frowned upon by the industry, and we believe that it is right to frown as many of these company fail to properly settle the accounts for you.
Does the company front load fees AFTER you reach a settlement? This is where a debt settlement company charges a lot up front instead of spreading the fees over multiple payments.
Many debt settlement companies charge a percentage of enrolled debt and a banking fee. You should know what percentage they charge and what the banking fee is. For example, having to pay 25% on an enrolled debt amount of $30,000 vs. 15% on an enrolled debt means that you would have to pay an additional $3,000. It's a big deal. For example, Ascend is a personal finance company that also has a debt settlement service, so we want to be completely upfront with pricing by putting the program pricing directly on our home page.

2) CUSTOMER SERVICE: It's imperative to understand who you will be working with AFTER you join the program. Many debt settlement companies have a salesman make the sale and then transfer you to a customer service specialist once you join the program. It may be helpful to find a program where you work with the same person from start to finish.

3) REVIEW BIAS: There are many review sites that will charge a fee to debt settlement companies for them to have a glowing review of the service, meaning that there is inherent bias because the advertiser is only giving a positive review because of the amount that the debt settlement service is paying.

4) DATA UTILIZATION: Not all debt settlement companies are created equal when it comes to data utilization to maximize debt reduction. This can be a question you ask in the onboarding process, "How does your debt settlement company use its data to maximize my debt reduction?" If the salesman does not know the answer or tries to make up an answer, the company probably does not use its data.

Debt Settlement Alternatives

The two most common alternatives to debt settlement (debt relief) are debt management and bankruptcy. We wrote two articles comparing debt settlement to both options to give you an idea whether one of those options may be better for you:

Debt Management vs Debt Settlement: Debt management companies work as an intermediary for those in debt and the creditor. The enrollee generally deposits money into an account managed by the debt management company, which is then used to fund the creditors over a specific period of time, generally between 3-5 years. This period is inflexible as the creditor generally sets a maximum time limit for the debt to be resolved.

Debt Settlement vs. Bankruptcy: There are two main types of bankruptcy - Chapter 7 and Chapter 13. The main difference between Chapter 7 and Chapter 13 bankruptcies is that all your debt is wiped out in Chapter 7 regardless of what you owe, whereas Chapter 13 is a restructuring of your debt, which is somewhat similar to Debt Settlement.

Is Debt Settlement Best For Me?

Debt settlement can be an excellent way to get out of debt and achieve financial freedom. Whether it's best for you depends on each individual as everyone comes to the table with different experiences and goals. Generally, we decide what's best based on a combination of your goals and preferences, mathematical equations of your income and expenses, and a full understanding of what will save you the most money and allow you to best achieve debt freedom.

Complete a short questionnaire to see what's best for you!