Advice and tips on how to settle your Debt

When the monthly income is insufficient to pay off the minimum monthly payments, it should be clear that one is in the midst of a financial crisis. The prospect of losing one’s possessions, like the family car or home, can be very stressful, so it becomes essential to sit down and try to figure out a way of solving the problem. Many people end up in debt during their lifetimes and depending on the amount of debt and how disciplined they are, there are a number of ways to get out of it, provided that sound debt advice is followed.

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Bankruptcy - The Last Option

Bankruptcy should not even be considered until all other options have been exhausted for a number of reasons. People filing for bankruptcy get a court discharge saying they do not have to pay certain debts. The bankruptcy information, however, remains on a credit report for ten years, and leads to difficulty in obtaining future credit, buying a home or even getting life insurance. At times, even getting a job becomes difficult for a person who has filed a bankruptcy. A person who declares bankruptcy is seen as untrustworthy and while with time the credit score does get better, it is not easy.

Another reason bankruptcy should be avoided is that bankruptcy lawyers represent one in court and since they make a profit when their clients declares bankruptcy, they will only tell them the advantages of taking that route; they will not tell them other ways to minimize debt. Also, sometimes a judge can confiscate all assets and sell them to give the cash to debtors. Since one can still end up losing everything, it is better to sell selected items one does not need to pay off creditors and find other ways to clear any remaining debt. The credit reputation will be saved and one may be able to hold on to the personal items they really like.

Debt consolidation

Debt consolidation is a method of combining the debt through a second mortgage on a home equity line of credit. If done carefully, it will allow one to lower the monthly payment and interest rate. It also means that there will only need to be one payment at the end of the month, making the forgetting of a bill unlikely. This can mean saving the money which might otherwise have to be paid in penalties or higher interest rates resulting from forgetting a payment. Consolidating debt through this type of a loan is usually more expensive, because one may have to pay “points,” where one point is 1% of the borrowed amount. However, this loan does have certain tax advantages that are not available with other types of loans, which just may make it cost effective. One word of caution here is that in this loan the home or some other property is put up as collateral, and if payments are not made, one can stand to lose it.

Debt Settlement

Debt settlement is another good option. In this process, one has to negotiate with the creditors to pay off all outstanding bills at a reduced amount. This can be done at a savings of as much as 40% to 60% of the original outstanding balance. One can join a debt settlement program or negotiate the settlement on their own, either way the process is the same.

A settlement company will have the client sign a limited power of attorney so they can go ahead and negotiate with the creditor on behalf of the client. A certain amount of money will have to be put aside on a regular basis to build a settlement fund. Once the fund contains sufficient amount of money to make a realistic offer, the debt negotiator will get the creditor to agree to a reduced payment in return for a letter from the creditor saying the outstanding amount was settled in full. Then one can again start putting money in a fund to take care of the next settlement.

One thing to keep in mind is that commercial debt settlement companies are in it for the money, and they charge hefty fees. For someone in the red already, this may not be feasible. In that case, one can try negotiating on their own. To carry out one’s own negotiations, follow the steps below:

• Be very precise and clear and explain the reasons behind not being able to pay in an unemotional, professional manner. Keep in mind that the creditors are not obligated to negotiate, so screaming or crying is not likely to affect them.
• If the creditor denies the request, do not give up too quickly. Explain why settling will be in their best interest in the long run and have details of how you plan to make the payment. This will show them that you are serious and not just playing games. Since any bank’s ultimate interest is their bottom line, stress that settling will be beneficial for them. If they still refuse, do not agree to anything on the phone before hanging up.
• Send a debt negotiating letter by certified mail, in which all arguments are stated clearly again. Keep copies for your own records.
• Remember that there is no guarantee that the creditor will agree to a reduced payment regardless of who is doing the negotiating - you or a professional settlement company. It is, however, worth the effort, because when they do agree it is usually at a greatly reduced amount. If one is still not comfortable talking to the creditors, then one can always hire a professional credit counseling firm for a fee. They can either negotiate for a single payment that is usually a low amount compared to the outstanding balance, or a limited number of monthly payments at a much lower interest rate that will fulfill the requirements of a new reduced balance.

A professional negotiator can usually get a lower settlement than one can negotiate on their own, thus saving more money for their client than the amount paid in fees. Before hiring a company, make sure it is authentic and not just someone after the money.