Find your Financial Confidence!
Find your Financial Confidence!
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Debt Settlement (also called debt reduction, debt negotiation or debt resolution is a settlement negotiated with a debtor's unsecured creditor. Commonly, creditors agree to forgive a large part of the debt: perhaps around half, though results can vary widely. When settlements are finalized, the terms are put in writing. It is common that the debtor makes lump-sum payment in exchange for the creditor agreeing that the debt is now cancelled and the matter closed. Some settlements are paid out over a number of months. In either case, as long as the debtor does what is agreed in the negotiation, no outstanding debt will appear on the former debtor's credit report.
As a concept, lenders have been practicing debt settlement for thousands of years. However, the business of debt settlement became prominent in the USA during the late 1980s and early 1990s, when bank deregulation, which loosened consumer lending practices, followed by an economic recession, placed consumers in financial hardship. With charge-offs (debts written-off by banks) increasing, banks established debt settlement departments whose staff were authorized to negotiate with defaulted cardholders to reduce the outstanding balances in the hope of recover funds that would otherwise be lost if the cardholder filed for Chapter 7 bankruptcy. Typical settlements ranged between 25% and 65% of the outstanding balance. Alongside, the unprecedented spike in personal debt loads, there has been another rather significant (even if criminally under-reported) change: the new legislation in 2005 that dramatically worsened the chances for average Americans to claim Chapter 7 bankruptcy protection. As things stand, should anyone filing for bankruptcy fail to meet the Internal Revenue Service regulated "means test" they would instead be shelved into the Chapter 13 debt restructuring plan. Essentially, Chapter 13 bankruptcies simply tell borrowers that they must pay back some or all of their debts to all unsecured lenders. Repayments under Chapter 13 can range from 1% to 100$ of all the amounts owed to unsecured creditors, based on the ability of the debtor to pay. Repayment periods are three years (for those who earn below the median income) or five years (for those above), under court mandated budgets that follow IRS guidelines, and the penalties for failure are more severe.
Debt settlement is the process of negotiating with creditors to reduce overall debts in exchange for a lump sum payment. A successful settlement occurs when the creditor agrees to forgive a percentage of the total account balance. Normally, only unsecured debts, not secured by real assets like homes and autos, can be settled. Unsecured debts include medical bills and credit card debt; but not public student loans, auto financing or mortgages. For the debtor, the settlement makes obvious sense: they avoid the stigma and intrusive court-mandated controls of bankruptcy while still lowering their debt balances, sometimes by more than 50% For the creditor, they regain trust that the borrower intends to pay back what he can of the loans and not file for bankruptcy (in which case, the creditor risks losing all moneys owed). Negotiating with a collection agency or junk debt buyer is somewhat similar to negotiating with a buyer has purchased the debt for a fraction of the original balance. As part of the settlement, the consumer can request that collection is removed from the credit report, which is generally not the case with the original creditor. Even if the collection account has been removed from the consumer credit report as a condition of settlement, as agreed during negotiations, the negative marks from the original credit card company will still remain, according to Maxine Sweet, a spokeswoman for credit reporting agency Experian.
Consolidating your debts into a single payment saves you time and money while offering peace of mind by simplifying what you owe each month. Our program provides you with: One low and affordable monthly payment.
In addition to having just a single bill every month, a Debt Management Plan will also help you better manage your credit score because you'll be making regular, timely payments. With the right plan, most clients are able to pay off their debt between 3-5 years, as opposed to the national average of around 30 years.
While they sound familiar, debt management programs and debt management loans are two very different things.
Debt management programs offer a proven process for combining your various unsecured debts (such as credit card bills, medical bills, unsecured loans, etc.) into one manageable monthly payment. A debt specialist will work with your creditors to consolidate your existing loans- no additional loans are required. Debt management loans present many risks and can actually hurt your credit because you end up paying more interest over time and may even have to use your home, car, or other assets as collateral in order to qualify. In this case, you risk losing these assets outright if you happen to default on your new loan.
While consolidation loans may seem like an easy way out of debt, there are a few downsides. In fact, some consolidation loans can turn out to be a bigger problem in disguise. They often require credit checks and have an array of criteria, making it difficult for you to qualify.
If you can manage to qualify at all, you may end up with a comparable interest rate extended over a longer period of time. As a result, your new consolidation loan may end up costing you more than if you had paid off your original loans instead. You risk losing any collateral if you happen to default on the loan. In addition to this, your debt can actually double.
The ultimate risk you take when relying on a consolidation loan to clear your financial slate is often inevitable rebound into more debts down the road. A debt management loan does nothing to improve your financial spending habits, its merely another loan and another option to help pay off your debt. Because of that, you run the risk of maxing out your credit cards again, thereby adding to your new loans payment's to the already heavy credit card payments that landed you in debt in the first place.
We know that untangling your credit can be both stressful and confusing. Send us a message today, and we can get you started on a path to financial confidence.
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