Debt settlement basically means agreeing to pay the creditors lesser than what you really owe. This must however be avoided, because it can affect your credit score, and will not be able to avail tax advantages.
Debt consolidation means taking a second loan. You may have to pledge your home or car as collateral, and there are chances of you losing them, if you repeatedly miss out on paying your premium.
Visit a Credit Counselor
Debt management on the other hand, is a less drastic way to resolve your issues, and get out of the tight spot. As soon as you see warning signs, like your income is insufficient to pay the debt, or if you are borrowing from one party to paying another creditor, then it is the right time for you to meet a credit counseling.
Credit counselor will do the debt settlement review and advice you on what kind of option will best suit your requirement, like the debt consolidation loans, bankruptcy declaration, or debt settlement.
Debt settlement dos and don’ts
Don’t Wait – Be Proactive
When your loan payment is running 6 months late, then don’t wait any longer. Contact your lenders immediately. In the charged-off loans, you get some waiver on late payment fees. Additionally, if you talk to them about debt settlement before the debts get written off, then they may be willing to discuss it, because they view it as less risky.
By being proactive, you get the opportunity to formulate the debt management plan, which allows paying the debts in full, and thus preventing your credit score from plummeting. These days, creditors try to work with consumers to reach agreeable settlements.
Don’t ignore the Consequences
Remember debt settlement will block your ability to borrow more money in the future, at least not on affordable interest rates. Credit report displays the debtors account as settled, but the future creditors get a signal that you borrowed cash but couldn’t pay it. You will look less trustworthy to the future lenders.
Do show your Financial Status
Before approving the settlement, creditors will look through your financial status like income, assets, and existing debts. They will need realistic proof of your destitution. This will allow them to ascertain the fact that you are not looking for ways to abscond. They will see that the best solution here to get some of their debts back, even if means offering you a concession.
Don’t Make Promises
If the creditor lets you pay debt over a period of time, then set realistic payment levels that can be managed conveniently. Paying off of large amounts can be difficult after the first installment. Missing on debt repayments can have your account referred to collection agencies.
Make sure that the issue is Settled
In case of debt settlement, it becomes necessary to ensure that it shows properly on credit reports. Some creditors forget to report it to credit bureaus. It is legally necessary, but due to creditor’s negligence, the consumers’ credit account displays them as wrongdoers.
Debt settlement options are many. It is very difficult to negotiate with each creditors, explain your situation and find out if you are eligible for the hardship program. Trying to consolidate your debt can be best solution for the moment, but might be risky in the long run. The best debt relief solutions also encourage behavior changes.