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It is no secret that the recent financial recession has left tons of people considering different credit card debt help ideas. The reality is, throughout the recession, many American families were forced to use their credit cards in situations that they generally wouldn’t. This has lead to amounting credit card debt in the United States. As things start to get better in the economic climate, more and more consumers are starting to look for aggressive ways to get out of credit card debt! One of the most sought after ways to get out of debt lately has been credit card debt settlement.
Credit card debt settlement is a process that allows consumers to pay a settled amount of money to completely wipe out their debts altogether. Generally, in these programs, consumers are able to pay anywhere from 35% to 55% of what they owe as a total payment which, sounds great! But, before making a decision, you need to know exactly how debt settlement works and how it will affect you in the long run. Knowing how this all works will probably make you think twice about this option.
The Debt Settlement Process
When you enroll into a credit card debt settlement program, there are several things that will happen. Below is a step by step outline of how this process works:
Step #1 – Generating A Payment Amount – Debt settlement is designed for consumers who simply can’t afford to pay their minimum payments on a monthly basis. Therefore, when enrolling a new customer into a debt settlement program, the representative for the company will ask several questions about income and expenses to find out exactly how much money the new customer can afford to comfortably pay on a monthly basis.
Step #2 – Setting Up A SPSA – SPSA stands for Special Purpose Savings Account. These are needed for the debt settlement process because the payments you make to the company you work with will not go directly to the lender or lenders they were intended for. The payments will be saved in a SPSA until the balance reaches an amount that can be used to settle at least one of your debts. With that said, as you make your payments, your accounts with the lenders will get further and further past due!
Step #3 – Signing The Power of Attorney – Before a debt settlement company can speak with your banks on your behalf, they will need to get either a full power of attorney over your finances or a limited power of attorney over your specific accounts. This means that if you enroll into a debt settlement service, you will be giving 100% of control of the accounts you plan to settle to a third party and you will no longer have a say in what happens!
Step #4 – The Settlement Negotiations – Once your SPSA has enough money to settle your debts, the settlement company will start to call your lenders and negotiate on your behalf. At this point, the lender has not received a payment in months or even years. Thinking that they are not going to see a payment if they are not willing to settle for less, the lenders will often agree to just about any settlement amount that your negotiations expert offers.
Step #5 – A Change In Your Credit Report – Once the lenders have settled your debts with the settlement company, they will notify the credit reporting agencies of a change to your accounts. Although many consumers think that the change will state that the account was paid as agreed, this is not the case. As a matter of fact, the lender will report that the accounts have been settled for a lesser amount to the credit reporting agencies.
The Positive Aspects Of Debt Settlement
Although, I would not advise most people to use debt settlement, in rare cases, I do advise my clients to go this direction. There are a few positive aspects of this process that you should know about. Here they are:
Positive Aspect #1 – Pay Less To Settle Debts – Let’s be honest, we all like to pay less for just about anything. During this process, you will be able to pay 35% to 55% of what you owe as a total repayment of your debt.
Positive Aspect #2 – Manage 1 Account Instead Of Several – Many consumers find themselves in the midst of a financial hardship not because they have too much debt but, because they don’t know the proper ways to handle several accounts. During this process, the accounts will all be managed as one with one simple monthly payment.
Positive Aspect #3 – Avoiding Bankruptcy – The only consumers that I advise debt settlement to are those who are strongly considering bankruptcy. With lower payments and one easy to manage account, many consumers find this to be the most practical way to avoid bankruptcy.
The Negative Aspects Of Debt Settlement
Negative Aspect #1 – Harming Credit Scores – Debt settlement programs will have an extremely negative reflection on your credit score. It’s pretty simple to see why this happens. The reality is, as you are saving money for the settlement, your lenders are not being paid. Your debts go further and further past due to the point that it looks as though you have abandoned your debts! When the accounts are finally paid off, it will show that they were settled for a lesser amount putting the final nail in the coffin that holds your past, positive credit scores! After paying your debts off completely, it can take years for you to have good credit again.
Negative Aspect #2 – The Sales Process – When we think of used car salesman, we generally think of a shady person that will keep on negotiating with you, sweet talking you until you give in and buy their product. This is generally the case with debt settlement sales people. The reality is, during the sales process, many salesmen will try to dial down the negative reflection on your credit report, the need of having a power of attorney and even the overall cost associated with the program. Once consumers sign up and find out the truth, in most cases, it’s too late to change their minds!
Negative Aspect #3 – Having No Say – When you sign up for a debt settlement program, you give a third party the power of attorney over your accounts. This means that what they say goes, no matter what you think! If you want to have a say in how your debts are handled, this is not the option for you!
Negative Aspect #4 – The Cost – Generally, debt settlement companies will charge thousands of dollars worth of fees over time for their services. If you do a little research, in most cases, you will be able to find a lower cost option that proves to be better for your unique situation!
In retrospect, you may have formed a new opinion of credit card debt settlement. I did not write this article to say that debt settlement is a horrible program and no one should use it. The purpose of this article was to make sure that those who choose this option know exactly what they are getting into. Also, many consumers choose debt settlement because they feel as though there is no other option. This is not the case! I’ve written several publications including “DIY Alternatives To Debt Consolidation” that were designed to help consumers to understand their options. I hope that you’ve enjoyed this article. More importantly, I hope that it has made you think about the decisions you make with regards to debt relief. If you need more counseling and if you have more questions about debt management and settlement, feel free to comment below.