If you're facing a huge stack of unpaid bills, it can feel as if you're drowning in debt.
Fortunately, options are available that could help you get those bills under control and eventually paid off.
For example, if the situation feels totally hopeless, you could file for bankruptcy. Thousands of people do this every year. Of course, filing for bankruptcy has a certain stigma. Plus, the bankruptcy will stay on your credit reports for up to 10 years. This will make it much harder to get credit, and when you do, it will have much higher interest rates.
A better option than bankruptcy for most people is debt settlement. This is a process where you negotiate with your creditors to get them to reduce the amount you owe on your unsecured debts.
Why you might ask, would a creditor agree to settle with you? Lenders such as credit card companies, doctors, and hospitals understand it's better to get something than nothing – which is what they would get if you filed for bankruptcy.
Three ways exist to do debt settlement. They are to use a debt settlement company, to hire an attorney, or to negotiate settlements yourself. Many people choose the second option – to use a debt settlement company. Several important reasons exist for this. First, most people lack the skills and experience necessary to do the negotiating themselves. Second, a creditor won't agree to settle unless you can make an immediate lump sum payment. And most people don't have enough cash available to make any lump sum payments.
If you choose to use a debt settlement company, you will transfer a set amount of money each month to an escrow-like account that you control. This money will accumulate for the future settlement of your debts. When enough money is in your account, the debt settlement company will begin contacting your creditors and offering them lump sum payments for less than you owe. Reputable settlement companies usually charge a percentage of the amount of the debt being settled. This typically ranges from 15% to 25%. They will add part of their fee to each of your monthly payments but not actually collect the money until they have settled all your debts.
Not every lender will agree to settle, regardless of whether you're using a debt settlement company or handling it yourself. Nothing says that companies must settle debts and some simply refuse.
If you settle your debts yourself, you may be able to talk your lenders into reporting your debts as paid in full, rather than as settled. However, if you use a debt settlement company it's almost certain your debts will be reported as "settled," "settlement," or "settled for less than the full amount owed." These notations will stay on your credit reports for seven years. They will hurt your credit score, and make it more difficult for you to get new credit. You will be charged higher interest rates, and your insurance premiums may even go up.
Before you sign up with a debt settlement company, you might consider hiring a settlement attorney. This is because a good attorney will analyze your situation and then provide you with practical legal advice. Debt settlement companies just can't do this.
There are good and bad debt settlement attorneys. The best way to avoid the bad ones is to use a local attorney where you can meet with her or him face-to-face. This means scheduling a meeting where you speak directly with the attorney. Ask if she or he will negotiate with your creditors, or will it be done by a staff member. In the event you are told the company is "attorney backed" or if you're not allowed to talk with an attorney, consider this to be a red flag that no attorney will actually be involved in your case.
A good attorney will go over all your options. She or he will be able to help you figure out if you should opt for debt settlement, or if you would be better off doing something else like filing for bankruptcy. If one of your creditors decides to sue you, the attorney will defend you, whereas a debt settlement company won't. And if a creditor were to violate a law such as the Fair Debt Collection Practices Act, an attorney can help you with specific advice and tell you how to proceed.
Don't be overwhelmed by your debt. As you have read, options are available. It's important to analyze each one carefully so that whether you choose DIY debt settlement, to hire a debt settlement company or an attorney you'll choose the option that will be best for you in the long run.