Debt Settlement (Debt Forgiveness) is a service that allows you to settle your debt for much less than your actual balance. Most settlements come in around 40-50% of your total debt. The typical debt settlement plan has all your credit card debt resolved after 3 years of payments.
Here’s how Debt Settlement works:
- Stop making payments to your creditors. In order for your creditor to make a less than full balance offer, you must be delinquent. It would be extremely rare for a credit card company to forgive a portion of your balance if you are current with payments. Mainly because the fact that you are able to make payments on time indicates a financial hardship does not exist. Typically, you need to fall 6+ months behind for enticing offers to come in from the banks.
- Start making payments to the Debt Forgiveness company instead. When a creditor makes an enticing offer, part of the deal is that the amount needs to be paid right away. For example, let’s say you owed Citibank $3,000. And they make an offer of $1,200. Then, you will need to pay that $1,200 immediately. Usually in the next 10 days or so. They don’t adjust the balance and then allow you to make minimum payments on it. It’s pay today or the offer gets cancelled. The debt settlement company will save each payment you make into a separate account. This way you will have enough to make a lump-sum settlement offer when the time comes.
- Your advisor negotiates with the creditor or collection agency. Once you have enough money saved up, your debt settlement company will start negotiations. Perhaps with the lowest balance account first if possible. But sometimes the company you hired knows which creditors need to go first. These credit card companies often agree to accept a reduced amount because they’d rather get something than nothing.
Pros and Cons of Debt Forgiveness
Pros:
- Provides a lower monthly payment to free up cash flow.
- Can reduce your total debt significantly.
- May help you avoid bankruptcy.
Cons:
- Damages your credit score for several years.
- You may owe taxes on forgiven debt.
- Risk of lawsuits if negotiations fail.
It’s usually a “last resort” option after trying things like budgeting, credit counseling, or debt management plans.