The Basics of Settling Your Debts

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The average household in America struggles under the load of $15,956 in credit card debt spread out over 3-4 cards. The total amount of revolving debt in this country is $801 billion — 98% of that on credit cards. In many ways, the card companies themselves are guilty of creating this situation since they profit from the interest charged on those balances.

It is common for people who are carrying credit card debt to pay the minimum balance only, which prolongs the life of the debt and increases the total amount paid. Competing card companies may offer free balance transfers at low interest rates — or no interest at all — only to dramatically escalate the interest rate when the agreed upon period has expired.

If consumers get into a situation of missing payments, or paying late, they are assessed penalty charges, and they face a reduction in their credit score. That single rating affects all aspects of an individual’s financial life, and may affect their ability to take out a mortgage or finance a car. The cycle is self-perpetuating and often vicious.

None of this means, however, that is is impossible to read a debt-free place in your life. There are many avenues to reach that point, including a debt settlement program.

What Is Debt Settlement?

Debt settlement is a negotiated process in which a creditor agrees to accept 20-75% of the full amount owed if that amount is paid in a lump sum. For the creditor, this is preferable to a delinquent debt, which would mean they would get nothing. Credit card companies are normally only willing to discuss such an arrangement if the card holder is six months or more behind in their payments, and usually only if a professional debt counselor is involved in the process.

While this arrangement does not repair your credit report, it avoids a potential bankruptcy filing. Normally the debtor works with an agency that pays the lump sum. Your debt is not actually erased, it is transferred to a single entity to whom you make a single, set, monthly payment. In the end, you may actually wind up paying more in interest if you cannot resolve the total debt quickly, but the point is to escape multiple payments and interest rates that prevent you from ever making real progress at debt resolution and that dramatically affect your quality of life and your ability to meet your other financial responsibilities.

How To Choose a Debt Settlement Program

As you begin to consider working with a company offering debt settlement services, realize that there are many predators in the industry ready to prey on your desperation. Being an informed consumer is your best bet for avoiding scam artists and settling your debts for good.

First, be sure the company you choose is accredited by The Association of Settlement Companies (TASC). This will ensure that the company is regularly evaluated for competence and performance. Also, check to see if the firm is a member of the Better Business Bureau or the local Chamber of Commerce.

Find out about important services like settlement or refund guarantees and bankruptcy assistance if the debt settlement does not progress according to plan. Some debt settlement companies will offer a refund to help pay for a bankruptcy attorney. If the company does offer such a guarantee, be sure to discuss it fully and obtain the details in writing.

Some settlement companies charge a percentage of your total debt, which could be as much as 15 to 18 percent. Others require a percentage of the debt savings, which is typically about 25 percent. There can also be sign-up fees and monthly charges. Be sure you understand in advance what you will pay and have at least a reasonable estimate of the amount.

There are many available debt settlement models that can be extremely useful in gaining control of your financial future. Take the time to do your homework and find out if the company you are considering is both ethical and reliable. When you find the right debt counselors for your situation, the results are well worth the trouble.

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