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A Debt Settlement Plan: Debt Help as Tough Love

A Debt Settlement Plan: Debt Help as Tough Love

If you are struggling with credit card debt or having a hard time keeping up with your mortgage payments, you might be looking for some form of debt relief. One debt relief option for extreme cases is a debt settlement plan. Think of debt settlement as tough love, or boot camp for your finances--it can whip them into shape, but it won't be easy. In the end though, it may be a viable way to avoid bankruptcy.

A debt settlement plan won't wave a magic wand and leave you with no debts and a high credit score. Expect to have some high payments to make, and understand that there may be some lingering consequences. Knowing what to expect from debt settlement can help you decide whether it is the best debt relief option for you.

What Debt Settlement Can Do
Debt settlement plans are offered by some financial advisors, credit counselors, and law firms. Under a debt settlement plan, you will make regular payments to the firm, which in turn will work with your creditors. This may involve some or all of the following:

  • Refinancing your debt to lower interest rates
  • Negotiating with creditors for debt relief or at least concessions on interest rates
  • Analyzing your credit score and working out strategies to improve it
  • Formulating a payment schedule for the paying down of your debt

In many ways, this is similar to what would happen in a bankruptcy process, but debt settlement can help you avoid bankruptcy.

What Debt Settlement Can't Do
While this may be just the type of debt help you need, you should also understand what debt settlement can't do:

  • It cannot eliminate problems with your past credit history, unless these can be clearly demonstrated to be the creditors' errors.
  • It cannot spare you some consequences from negotiating away debt. If creditors agree to write off some portion of your debt, this will appear on your credit report. The resulting damage to your credit score may mean high payments on debt in the future. Also, the portion of debt written off may be taxable to you as income.
  • It cannot take ultimate responsibility for the plan. Be sure you are satisfied that the plan is realistic, and does not involve fraud or any other type of illegal activity. Be especially careful that collateralized debts have been prioritized above unsecured debt. Unsecured debt, such as credit card debt, represents a general claim on you, but collateralized debt (such as a mortgage or car loan) can result directly in loss of property if it is not repaid.

Other Debt Relief Options
A debt settlement plan may be preferable to bankruptcy and the best option for certain debtors. There are likely to be fees for such a plan, and it can leave you with damaged credit and tax liabilities. All this may be worth it to avoid bankruptcy, but before you go that far, consider other debt relief options, such as credit counseling, negotiating with creditors directly, refinancing, and formulating your own formal budget and repayment plan.

Tough love may be the answer to some problems, but only after everything else has failed.

Sources:
Cleveland Plain Dealer
Federal Trade Commission
DebtHelp.com
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