How to Stop Debt Collection and Get Relief?

Is a debt settlement program the least expensive option to get out of debt if you are in debt and unable to pay your bills? Depending on the details of your case, it may be, especially if you have a large amount of high-interest debt.

Although they charge fees to manage the discussions on your behalf, debt settlement organizations work with your creditors to reduce your present debt to a level that you can afford. Those fees can reduce your relief even if you could wind up owing your creditors less.

Key Takeaways

• Offering a creditor a lump sum payment in return for a portion of your debt being forgiven is known as debt settlement.
• You have two options: work with a debt settlement firm to help you settle your debts, or try to do it yourself.
• 10% to 50% of your total debt is the typical range of offers for debt settlement.
• Even if you are dealing with a respectable debt settlement firm, creditors are not required to accept an offer and lower your debt.

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What Is Debt Settlement?

Debt settlement, sometimes referred to as debt relief or debt adjustment, is the process of settling outstanding debt by guaranteeing the lender a sizable lump sum payment that is significantly less than the total amount owed. This is sometimes called a discounted payout (DPO). Only a portion of your debt may be offered by a debt settlement, typically 48%; however, in certain circumstances, you may owe as much as 80%. It is then up to the creditor to determine whether to accept.

“Debt settlement can save consumers money by allowing them to resolve their debts for less than the full balance,” said Gerri Detweiler, co-author of the e-book Debt Collection Answers: How To Use Debt Collection Laws to Protect Your Rights. “It can be a way out of debt for some individuals who can’t afford to pay back the full amount they owe,” she added.

Customers have the option of hiring a debt settlement company to handle their debt settlement or attempting to do it themselves. In the latter instance, a fee that is determined by a percentage of your enrolled debt will be paid to the firm. The total amount of debt you have when you enroll in the program is known as your enrolled debt. The business is legally prohibited from charging this fee until your debt has been paid off. Fees range from 15% to 25% on average and keep in mind that the settlement company keeps them instead of applying them to your debt.

Paying taxes may sometimes be a part of debt settlement. Forgiveness of debt is typically regarded by the Internal Revenue Service (IRS) as taxable income. 

Warning: The settling of a debt will probably have a detrimental effect on your credit score. Typically, a debt settlement remains on your credit report for seven years after the first delinquency date. 

Debt settlement can help you pay less, but only if you act fast. Let Shepherd Outsourcing work with your creditors to create a solution that fits your budget. Contact us now to get started!

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Strategies and Risks of Debt Settlement

Debt settlement may seem like a lifeline for managing overwhelming debt, but it comes with complex strategies and significant risks that can impact your financial future.

Strategies

1. Stopping Paymentssome text
   • Debt settlement firms often advise consumers to stop making payments entirely to build negotiation leverage.
   • The logic: withholding payments might incentivize creditors to agree to a reduced settlement.
2. Negotiating a Settlementsome text
   • Settling debt for less than the total owed is the primary objective of debt settlement programs.
   • Consumers with lump-sum funds available for settlement can expedite the process.
3. Working with Credit Counselingsome text
   • Some creditors, like Chase, will only engage directly with the consumer or with nonprofit credit counseling agencies.
   • Engaging recognized organizations can lead to better outcomes without harming credit as severely.
4. Understanding Legal Riskssome text
   • Larger debts (e.g., over $5,000) are more likely to result in lawsuits. Consumers must weigh this risk when deciding to pursue settlement.

Risks

1. Credit Score Damagesome text
   • Failing to make payments can lower credit scores significantly, often into the mid-500s or lower.
   • Late payments may stay on credit reports for up to seven years.
2. Accrued Interest and Penaltiessome text
   • Ignoring payments results in added interest and late fees, increasing overall debt levels if the settlement fails.
3. Debt Collection and Legal Actionsome text
   • Falling behind on payments triggers persistent calls from debt collectors.
   • Creditors may sue, leading to judgments and potential wage garnishments.
4. No Guarantees of Settlementsome text
   • Lenders may refuse to settle or may demand a higher amount than anticipated.
   • Some lenders, like Chase, refuse to work with debt settlement companies.
5. Potentially Higher Debtsome text
   • If negotiations fail, accrued penalties can leave consumers in a worse financial position than before.
6. Loss of Savings to Feessome text
   • The CFPB warns that settlement savings can be negated by fees, fines, and accrued interest on outstanding balances.
7. Reputational and Emotional Stresssome text
   • Persistent collection calls and legal threats can add emotional strain to an already challenging situation.

Debt settlement can be a viable option for some, but it comes with significant risks and potential long-term consequences. Carefully consider alternatives, such as debt management or consolidation, before proceeding.

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Debt Settlement vs. Bankruptcy

For people who are overburdened with debt, debt settlement is not their only choice. In Chapter 7 bankruptcy, the debtor's nonexempt assets are liquidated, and the money raised is used to pay back creditors. Although they differ from state to state, household and personal belongings, a certain amount of home equity, retirement accounts, and a car are frequently considered exempt assets.

"If a consumer is eligible for Chapter 7 bankruptcy, it may be a faster option compared with debt settlement," Detweiler stated. It is a legal procedure that can prevent lawsuits and collection calls. These assurances are not provided by debt settlement.

However, there are a number of reasons why Chapter 7 might not be a smart choice, she continues. Customers who feel they must keep property may be forced to give it up. Or they could prefer that their financial difficulties remain private.

Because some businesses run credit checks on applicants as part of the hiring process, people who file for bankruptcy may also find that their employment possibilities are reduced.

A further issue that many consumers with debt have is the inability to pay for a bankruptcy lawyer. In certain instances, the court could deny their application.

When compared to years of debt settlement, Chapter 7 bankruptcy can be completed in three to six months. Although bankruptcy can be on your credit reports for up to ten years after the filing date, it can be less stressful and allow your credit score to recover more quickly.

Note: It should be noted that a lot of debt relief and settlement programs demand you to make a monthly contribution into a specific savings account. Ascertain that you have the financial capacity to make those deposits for the duration of the debt settlement program before enrolling.

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Debt Settlement vs. Minimum Monthly Payments

Saving money is not a good reason for consumers to make minimum monthly payments on high-interest loans. Depending on the amount of debt you have and the interest rate, it may take years or even decades. Usually, interest compounds daily on your total balance, and you don't get much closer to paying off your balance each month if you only make minimal payments.

Making the bare minimum of payments each month and paying a ton of interest could make you extremely wealthy for your creditors. While having a strong payment history helps your credit score, paying more interest than necessary is a very costly approach to raise your credit score. You need money in the bank to fund your retirement, not a high credit score. 

Furthermore, you risk damaging your credit score and maybe undoing the impact of your regular, on-time payments if the amount of accessible credit you have utilized is large in comparison to your credit line.

Tip: When customers routinely only pay the minimum amount due each month on high-interest credit card debt, they may wind up paying more interest than the principal amount.

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Debt Settlement vs. Credit Counseling

Understanding the key differences between debt settlement, credit counseling, and debt consolidation can help you choose the best strategy to manage your financial challenges effectively.

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Conclusion 

Sometimes the cheapest option to pay off debt is through debt settlement. In addition to the amount you owe, additional things to take into account include how long it takes and how stressful it could be in comparison to the other options. It's crucial to weigh the benefits and drawbacks of debt settlement before making a decision, and if you do, to confirm that the business you're working with is trustworthy.

Investigating every alternative is the best course of action. "If you are having financial difficulties, consult a bankruptcy lawyer, a debt settlement specialist, and a credit counseling agency so you are aware of your options and can make an informed choice," Detweiler said. 

If you’re struggling with overwhelming debt, there’s a way out. Shepherd Outsourcing offers personalized debt solutions to help you move forward. Reach out today and take the first step towards financial freedom!