Debt Settlement FAQs: What is Debt Settlement?

Debt settlement is a service offered to debtors across the United States, one that can help them clear their debts for an affordable amount. In this guide, we’ll answer some of the most frequently asked questions about this industry and the settlement process.

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How Does it Work?

Debt settlement companies offer a free consultation in the first instance. Some companies are known to pressure sell and should be avoided, but many will provide you with honest, helpful advice; if you’re not a good fit, they will tell you so.

Once you find the best debt settlement company for you, the next step is to sign up, create an account with a third-party provider and then deposit money into that account on a regular basis. A debt specialist will then contact your creditors on your behalf and negotiate reduced settlements, using your funds as payment. Their goal is to settle the debts for as little as possible, with an average saving of around 40% to 50%. This means that a total debt of $10,000 could be cleared for $5,000 to $6,000.

Is Debt Settlement a Scam?

Debt settlement itself is not a scam, but there are scam companies out there, as well as companies that are not as diligent or efficient as they should be. Always do your research, never sign with the first company that you find or the first offer you get, and if you have your suspicions about a company (pressure selling, high prices, being intentionally vague) then move on.

Will Debt Settlement Affect my Credit Score?

Signing a debt settlement contract is not enough to reduce your credit score, but the process might. The company may encourage you to stop making payments on your debts, allowing you to put that money towards your settlements. This could lead to delinquent payments, which can have a hugely negative impact on your credit score.

It’s also possible for your debts to be sent for collections or for you to be sued over delinquent payments.

Will it Debt Settlement Ruin my Credit?

The debt settlement process can take years and may lead to missed payments, which could reduce your credit score. However, in the long run it will clear your debts and help you to get back into the black, thus improving your score significantly.

Of course, this only applies if you are working with a legitimate debt settlement company. There are a few scams out there and there are also companies that won’t provide the level of service you need.

How Much Does Debt Settlement Cost?

Debt settlement costs vary from company to company, but the law insists that they can’t charge you a penny until the debts have been settled. They may still be able to charge you a fee even if the entire debt wasn’t settled, but generally speaking you will save much more than you will spend.

The fee will either be a percentage of the total debt or a percentage of the amount of money they save you. A debt settlement company may also charge additional setup fees and monthly fees, such as fees for the use of a third-party bank account. These costs are often minimal, however.

Shop around before agreeing to any offer and make sure you check whether the final charge is a percentage of the savings or the debt.

Do Creditors Always Negotiate a Settlement?

No. Some creditors will refuse to negotiate, while others will simply not settle for an amount deemed acceptable by the settlement company. Generally speaking, if your debts are old, you have a lot of them, or there are many missed payments, they will be more inclined to accept, but there is no guarantee.

Is Debt Settlement Worth It?

Debt settlement can seem expensive and risky. It’s also a drawn-out process. However, estimates suggest that it saves consumers between $2.60 and $2.70 for every $1 they spend in fees. In other words, if the company is taking a $10,000 cut, it’s only because they’ve saved you $26,000 to $27,000. 

What Percentage of a Debt is Typically Accepted?

A good debt specialist will try to settle the debt for as little as possible and it’s not unheard of for large unsecured debts to be settled for 80% to 90% less. However, the average is around half this. It all depends on the type and history of the debt, as well as the company negotiating it. 

A debt settlement cannot realistically guarantee you a percentage saving and you should be wary of any company that does.

Can You Negotiate Debt Settlement Alone?

There’s nothing stopping you from undertaking the debt settlement process by yourself. You will have more control and you won’t be hit with any fees. However, you don’t have the experience that a debt settlement company has and may struggle to attain the sort of settlements they could achieve.

It can also take up a lot of your time and is therefore not advised if you have a busy work and home life.

Can You Cancel a Debt Settlement Contract?

If you have only just signed the contract and have yet to make any commitments, then cancellation shouldn’t be an issue. However, if they have started the settlement process then it could be tricky and it’s best to speak to an attorney. You can read the contract yourself and look for possible get-out clauses, but you’ll likely find that they’ve made cancellation incredibly difficult.

If you cancel during the settlement process, then all unsettled debts will still be active, and you will need to find new solutions for dealing with them. 

Will Debt Settlement Affect my Security Clearance?

There are many things that can impact your security clearance, from fraud to delinquent debts and repossessions. However, “settled” debts should not hurt your chances of getting clearance and simply signing with a debt settlement company won’t either.

This is something you can discuss during your initial consultation. Let them know your concerns about delinquencies and missed payments and make it clear that you can’t afford to risk losing your security clearance.