Can debt settlement help you?Hardly anyone takes on debt with the intention of not paying it off. Unfortunately, though, life happens, and unexpected occurrences can make our financial plans go askew. Luckily, in today’s world, consumers have options that can help address the issues that an unpaid debt can pose. There are a number of ways to handle unpayable debt, but debt settlement is one debt relief method available to those struggling with debt payments. To help you determine if it’s the right solution for you, we’re digging into debt settlement and how it can be used to help you if you’re in a financial bind.

Defining debt settlement

Debt settlement is exactly what it sounds like. Settling a debt means that you talk to your lender, creditor or a collections agency to negotiate the conditions that will end your debt obligation. Usually, settlement payments are made in a lump sum for a percentage of the entire debt, although sometimes lucky debtors might be able to get their debt collector to agree to a reduced payment installment plan. While settlement isn’t as extreme as more drastic options like bankruptcy, it’s not an option you’ll want to take too lightly. That’s because settlement can still have a negative impact on your credit – you are failing to pay your creditor in full, after all – but the effect isn’t as bad as an outright charge-off resulting from defaulting on your balance.

How do I settle my debt?

Debt settlement can be somewhat daunting, especially for those who might not be familiar with the credit system or have confidence in their negotiation skills. That’s because there are different ways to go about debt settlement. Below, we’ll cover as many of these as we can.

If you’re settling with your original creditor …

Although debt settlement is presented as an option for those who’ve already had their debt issued to collections, it’s also possible in some instances to settle your debt before your creditor writes it off and hands it to someone else. That’s because even if creditors expect full payment, receiving some or most of your owed balance is better than having to write it off entirely. Settlement isn’t available to debtors until they’ve been in delinquency for some time. That said, it’s best that you not miss payments simply to seek out an opportunity to pay less than what you owe, as this places you in a desperate situation that could result in credit score markdowns or default. In the instance that you have genuine hardship that’s caused you to miss payments for legitimate reasons, contact your creditor and explain your story to them. Before taking with them, have in mind the amount you can afford to pay. Since this is a negotiation process, don’t disclose that value initially but, rather, work your way up to it through your negotiations. It might be easier to pay a little less if you already have the money on-hand and are willing to pay in a lump sum. Once you’ve negotiated a payment value, make sure to ask your creditor to report your agreement to the credit bureaus. Your credit reports should at least note the payment as settled if your account isn’t merely closed by your creditor without issues. While you should try and fight for your creditor to close your account in good standing, your energies may be best spent on making sure you can pay the lowest balance they’ll agree to. If your creditor reports the account as not paid in full or if they fail to remove the marks associated with the account before settlement, this will hurt your credit severely, but some creditors aren’t likely to budge on this. Whatever your final agreement is, make sure to request to have it stated in writing for your future reference.

If you’re settling while your debt is in collections …

Settling with collection agencies can be a mixed bag. On one hand, since many of these entities buy debt for pennies on the dollar, it might be easier to negotiate a reduced payment agreement with them. So long as they get some percentage of what they paid for your debt, even if it’s nowhere near what you owe, they’ll be happy. On the other hand, collection agencies can be challenging to deal with. Some (though not all) use unscrupulous tactics to get more money out of debtors. You’ll have to put in a lot more work to verify that the collector who claims to own your debt, in fact, does and that they intend to honor any agreements you make with them. Furthermore, by this stage of the game, your credit will have been pretty banged up by your creditor’s discharge of your original balance, which means the benefits of settlement won’t be as great as they would be if you’d settled with your original lender. As was the case with creditors, make sure you get any agreements in writing.

Should you go it alone?

With debt settlement, you can choose to negotiate on your own or work with consumer lawyers or debt settlement agencies. All options have their pros and cons, but it’s definitely a decision you don’t want to take lightly. Lawyers and settlement agencies aren’t cheap and when combined with the taxes you might have to pay on any forgiven balances, you could wind up in a tighter financial spot than when you settled the balance. You need to weigh the value that third-party support brings to the table for you personally. While the settlement process can be done on your own, it can be time consuming and difficult, especially for individuals who might struggle with bargaining. Keep in mind, though, finding a trustworthy third-party to help you with your settlement might be a challenging commitment all its own.

Are there any downsides to debt settlement?

Given that settlement is a last-ditch effort, it can feel like a Pyrrhic victory. If you don’t get a creditor or collections agency to remove the derogatory marks leading up to the settlement, or if they note that you paid less than the full amount on your credit reports, the consequences can be pretty severe. By settling a debt, you’re merely staving off the worst-case scenario which, given all the effort required during your negotiation, might not leave you feeling all that great afterward. The best option for your overall credit health is to avoid settlement altogether. If you begin struggling with payments, make sure to keep in touch with your creditor. Remember that if you have specific hardships, share them so that you can potentially get a forbearance or deferred payment. If you’ve been a good borrower, you might be able to work out a payment plan without having to arrange a settlement.

Debt settlement is a confusing topic, but if you understand your options and determine how you’ll be impacted, you can be sure that you’re making the right decision to rid yourself of the debt. For more information about managing your credit and your finances, keep reading our personal finance blog.