16 May Should I Settle My Debt?
Debt settlement describes the agreement between a consumer and a lender, financier, company, or institution to consider a debt resolved or “settled” upon payment in full at a lesser amount than what is actually owed. This is an alternative to other forms of debt management and resolution such as payment plans, budgeting, spending schedules and more. When you owe more than you are able or willing to pay, debt settlement may appear to be an attractive alternative. However, there are some less than attractive factors to consider before making your final decision.
In our economy, creditors are typically eager to avoid writing off debt. They know that, with the proper motivation, many customers may actually be able to generate the means and commit to paying off their debts under the right circumstances. Use this to your advantage! If you care about your credit history and FICO score, don’t wait six months or more until the account has been charged off. A charge off is a note that is reported to credit bureaus indicating that the creditor has very little confidence that you will ever pay the debt. This will hurt your credit score and blemish your credit history.
Instead, take the initiative sooner than later to contact your creditor and make arrangements to pay the debt. Even when requesting a debt settlement, you may still be able to pay in increments or installments, which is even more accommodating to you! Not only will you end up paying less than what you owe, but you may also have the benefit of paying a little at a time.
Contacting your creditor and making a payment arrangement or debt settlement agreement is the first step. However, it is important to note that what you don’t know can hurt you. Your creditor is unlikely to detail the adverse effect that settling will have on your FICO score. While the creditor is happier to accept some payment than no payment at all, they are still likely to list the account as “settled” or paid less than the amount owed. This indicates to future lenders that you may be somewhat of a credit risk and is a red flag on your credit report. Ultimately this can cost you more due to less affordable interest rates and difficulty being financed in the future.
Prior to agreeing to settle a debt you, the consumer, have a few cards to play. Although you do owe the balance on the account, the lender is at somewhat of a disadvantage because they cannot actually force or compel you to pay. Use this to your advantage! Take this opportunity to negotiate the things you want before agreeing to the final settlement amount.
Standard industry practice is for calls of this nature to be recorded, particularly when there is an attempt to collect a debt. Know that there is proof of what you have requested the creditor to agree to do. Make sure that creditors agree to stop any further collection efforts including emails, letter, and phone calls that can be flat out annoying! Find out exactly how the settlement will ultimately be reflected on your credit report and make sure it does.
Once you pay a debt settlement, check your report after 30, 60, 90 days to ensure that the settlement is reported according to the terms that were agreed upon. Creditors are required, by law, to report debt settlements. Unfortunately, in some instances, they fail to do so resulting in accounts that report as delinquent indefinitely.
Debt settlement is one of many ways to manage and resolve debt that has become difficult or impossible to pay. However, you should never feel as though you don’t have option. Good credit is accessible to everyone, with a little help. Allow AMB Credit Consultants to assist you in making the transition to healthy credit.