The debt situation in the U.S. today is worrying. According to the U.S. Census Bureau and theFederal Reserve data, the average American credit debt is $3,600. For families, the averagedebt is around $16,061, which is close to the situation in 2008.
This comes against the backdrop ofthe increasing cost of living. While incomes have been increasing, the rate is not enough to keep upwith financial obligations. This means more people are expected to fall into debt.
For businesses, the situation is also the same and this has led to the collapse of many small andmedium-sized enterprises (SMEs). A 2014 Fortune Report highlights cash flow as the mainproblem leading to the collapse of small businesses. These sentiments are also supported bythe U.S. Small Business Administration (SBA) which says debt servicing takes up a large chunk ofrevenues generated by the businesses.
In the current financial environment, things are not expected to improve and this is one reasonwhy consumers need to find a way to deal with debts. While there are many financialstrategies to help deal with multiple loans, most consumers are not able to leverage them dueto a lack of necessary information. Still, others are duped into debt relief programs which end upthrowing them deeper into the debt abyss.
One of the most common solutions to debt is debt settlement. This is one of the best-knownfinancial solutions, probably because it is heavily advertised on both traditional and digitalmedia platforms. Before determining whether to go for debt settlement, it is crucial to getmore insight into this financial strategy.
Below are some highlights to demystify debt settlement to help you make a better financialdecision:
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The Basics of Debt Settlement
What is debt settlement anyway? Is a debt consolidation meaning the same as a debtsettlement? These are questions consumers ask but in most cases, they are in a great rush tofind the right answers. In the simplest manner, debt settlement involves negotiations with yourcreditor for a lower payment of the owed amount.
In an ideal situation, you will find a debt settlement company with vast experience in theindustry to act on your behalf. This means you will not be involved in the negotiations but thedebt settlement company will be working for you. In the agreement, the creditor will agree to alump sum to be paid by the company.
For this to work, you will open an account with the company from which they will pay yourcreditor’s agreed amounts. In essence, your creditors will be convinced to take the one-off lumpsum which is lower than what they would have gotten from you if you were to repay the loanfor the full term.
The agreement will be between the creditor and collection agency or credit card company, butthe bottom line is that the amount you will pay will be lower. The negotiation skills of your debtsettlement company will come in handy to ensure you get the best deal. In turn, you will pay acommission or fee for the service.
Advantages of Debt Settlement
When searching for a financial solution to your debts, make sure the option you settle for doesnot lead to more problems. It is important to appreciate that every debt solution cannot applyto your case, hence the need to talk to a financial expert who is well-versed in the optionsavailable.
For debt settlement, there are several advantages including:
- Lower single payment –Once your payments to the credit agency are enough to makethe agreed lump sum to your creditor, you will not have to worry about the debt again.This is a win-win situation for both the creditor and the debtor. You have peace of mindonce the debt is paid and the creditor does not have to incur extra costs trying to pursuepayment.
- Better control of your finances– Handling multiple loans is a tough task, especially whenyou still have other financial obligations to meet. By settling the larger debts first, youwill have more control over your finances. It is easier to budget when you don’t havebills hanging over your head.
- Avoid bankruptcy or loss of your investment – Bankruptcy is the worst thing anyone hasto go through. It impacts generations to come and leads to myriad missedopportunities in life. Debt settlement can save you from this agony and prevent the loss ofyour business assets.
Drawbacks of Debt Settlement
While debt settlement is ideal for those with very poor credit scores, it can also affect younegatively. As such, you need to understand the drawbacks in order to make an informeddecision.
Below are some of the expected drawbacks:
- Damage to your credit scores –Once you have repaid your pending debts, thisinformation is reflected in your credit report. The credit card company or other creditorswhom you have repaid will report this as a settled amount for less than agreed. Inessence, your credit card will be damaged for 7 years.
- Constant collection calls –In most cases, debt settlement companies will advise you toignore both the creditors and collection agencies. The idea here is to force them toeventually agree to any amount they put on the table. This not only ruins your creditscore further but also puts you at risk of legal action.
- Unclear payments –A debt settlement company might not reveal exactly how muchmoney is going to debt repayment and what is going to their fee payment.
To avoid being scammed, take the time to do background checks on any company that you want touse. Avoid any agent who contacts you without your prompting and make sure any agreementsthat you are about to sign are fully understood.
It is also advisable to check the reputation of the debt settlement company through the BetterBusiness Bureau (BBB), online reviews, and by seeking referrals from other clients.
Conclusion
If you are looking for a solution to ballooning debts, you can opt for a not-for-profit DebtManagement Program (DMP) or Online Las Vegas consolidating companies. In loanconsolidation, you will have an easier single repayment to deal with after settling all the otherdebts while a DMP’s focus is to see you get out of debt fast.
