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5 Things To Consider in a Debt Settlement Plan

5 Things To Consider in a Debt Settlement Plan

A debt settlement plan is a pretty severe form of debt relief which you may pursue as a last-ditch effort to avoid bankruptcy. This form of debt help is more likely to work for you if you understand some of the key considerations in formulating a debt settlement plan.

Listed below are five things to consider when pursuing debt settlement.

1. Reputation
Debt settlement can be an effective form of debt relief, but it also has some potential for abuse. Investigate the reputation of any firm you are thinking of working with by doing Internet research, checking with your local better business bureau and state attorney general, and asking for references.

2. Methods
There are several methods of debt help available, so understand the approach your debt settlement firm is proposing. Most likely, they will be pursuing some combination of the following debt relief methods:

  • Refinancing
  • Negotiating with creditors
  • Analyzing your credit score
Make sure they spell out all your debt relief options and that the plan adds up. Hiring a debt settlement firm does not absolve you of responsibility. You will be owe any lingering debts and your damaged credit score won't recover immediately. Again, use a reputable firm--you may have legal liability if the plan includes any fraudulent activity.

 

3. Negotiation with Creditors
Negotiation with creditors to reduce your debt burden sounds like an ideal debt relief option, but it is not a free lunch. If a creditor is prevailed upon to write down a portion of your debts it will affect your credit score. The result may be higher interest rates on debt in the future, or even higher payments on your remaining credit card debt. Furthermore, any portion of debt which is forgiven by a creditor may be taxable as income to you.

If possible, it may be better to negotiate with creditors for debt relief in the form of a break on interest rates and/or a longer repayment term. These can help make your debt burden more manageable without the consequences mentioned above.

4. Fees and Incentives
Don't pay for anything until you have agreed upon a debt settlement plan, and make sure all financial arrangements are disclosed in writing. For example, the fees may seem reasonable, but the real incentive may be some share of the debt forgiven by your creditors.

5. The Payment Schedule
At the heart of the debt settlement plan is the payment schedule. Make sure of the following:

  • You can keep up with the payments on this schedule.
  • That the payment schedule correctly accounts for both secured and unsecured debt (typically, credit card debt). Since unsecured debt does not involve a direct claim on specific property, you'll want to make sure that any collateralized loans, such as mortgages, receive top priority.
  • That the schedule spells out which portion of your payments are going to your creditors. If you are making high payments to the debt relief firm and only a little of this is being passed along to creditors, something is wrong.
Since the goal of a debt settlement plan is to help you avoid bankruptcy, it is important to formulate a plan that is truly a better alternative to bankruptcy.

 

Sources:
Cleveland Plain Dealer
Federal Trade Commission

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