You’ve lost the handle on your debts and don’t see any way you can pay them off on your own. So, you’re thinking about going the debt relief route, which is a way for you to settle with your creditors and start anew. Beyond that, you’re a bit fuzzy on the details. To help you, here are key debt relief details you should know.
Just What is Debt Relief?
Also known as debt settlement, debt relief involves you hiring a company such as Freedom Debt Relief that specializes in negotiating with creditors to arrive at a sum of less than what you owe to have your debts marked as “settled.” Why would creditors settle for less? Well, they understand that if they say no, you just might pursue bankruptcy, in which case they might get nada.
Now, you can, indeed, pursue debt relief on your own. However, it’s generally easier and faster to enlist the services of a professional debt relief firm. That’s what we focus on here. Note, too, that debt consolidation in California – and elsewhere, for that matter – doesn’t really work if you have bad credit or a high debt-to-income ratio.
How Debt Relief Works
You’ll have a consultation with a company representative who will size up your situation and craft a plan just for you. Then, the funds that ordinarily would go directly to your creditors each month will instead be deposited in a special savings account.
Once you’ve saved enough, your negotiators will try to strike a deal with each of your creditors that will allow you to make a one-time payment in full to clear your obligation. You will be asked to sign off on each agreement, so there will be no surprises there. Once you do, the creditor will be paid from the savings account, and the debt relief company will get its fee. Freedom Debt Relief, for instance, charges between 15-25 percent of the amount you save.
Note that debt relief companies deal in unsecured debt, which is not tied to collateral. If a secured debt is in arrears, lenders can simply sell the asset involved to recoup their investment. So, typically, debt relief usually involves credit cards, personal loans, and medical bills. Debt consolidation in California, or elsewhere, may be an option, but only if the credit scores are there for a lower rate.
You also must be markedly behind in your bills for a lender to mull a settlement offer. In other words, if you’re current, or perhaps behind by a payment, your offer likely won’t fly. Also, many debt relief agencies require a debt load of a certain minimum amount before they will take your case.
Possible Debt Relief Drawbacks
Note that you’ll be asked to save money instead of paying creditors directly. This will cause collection calls and a substantial drop in your credit scores. However, you’re likely getting such calls already, and your credit scores by this point have seen better days.
Once you’ve settled your debts – in around two to four years – you can begin rebuilding your credit. Were you to make minimum payments on your debts, it would take years, if not decades, to wipe out your balances.
There’s also a small chance a creditor will reject your offer. If that’s the case, and your other creditors are on board with settlements, you can deal with that creditor on your own as you see fit.
Moreover, the Internal Revenue Service just might consider as income your debts that are forgiven. Have a conversation with your tax professional about this before agreeing to settlements.
So, those are key details of debt relief that you should know to help you solidify your position. While the strategy isn’t for everyone, it certainly has helped scores of people regain their financial footing.