Getting Out of Debt – The Pros & Cons of Debt Settlement in Texas

If you are swimming in debt, you’re bound to start looking for a way out. Many people see debt settlement –an option that advertises to help you pay off your debt for much less than what you owe– as a way out of their financial woes. However, the truth isn’t quite as simple as all that. Debt settlement isn’t without pitfalls and consequences — and it isn’t for everyone.

What Is Debt Settlement?

Debt settlement is, simply put, hiring a debt settlement company to help negotiate lower payoffs on personal loans, collections, and open accounts like credit cards. Sometimes these companies misleadingly advertise their services as a way to consolidate debt — or “debt consolidation,” — but make no bones about it, this is not a debt consolidation loan. Their main objective is to negotiate a settlement with all of your creditors and lenders.

How Debt Settlement Companies Work

When you hire a debt settlement company you are hiring them to negotiate with your lenders on your behalf. Their job is to negotiate a new, much lower amount for you to pay on the account. In turn, you pay the debt settlement company a monthly payment and they pay your creditors, minus their commission or fee which they deduct from your payment.

When you hire a debt settlement company the first thing they will tell you is to stop communicating with your lenders or collectors. Their objective here is to get your lenders so desperate for some sort of payment that they’ll be more open to accepting a settlement deal. A settlement means that the lender, collection agency, or credit card company agrees to take a significantly lower payoff amount than what you actually owe, wiping your slate clear from the financial obligation.

Pros of Debt Settlement

There’s one obvious pro to debt settlement: a much lower, single monthly payment that you can afford. And, if a settlement is negotiated and accepted, you will pay much much less than you initially owed on the account. Many times this amount is less than 50% of the original debt, which can end up saving you quite a lot of money in the long run.

Cons of Debt Settlement

The cons from going down this road is that your credit score will be negatively impacted until your debts are negotiated and the payments have all been made. This means that you will not be able to obtain new credit cards while going through the process. This also means that if you want to buy a home or refinance your current existing mortgage, you will have to wait until you are finished with the debt settlement program.

In addition, if you want to buy a new or used car, you will have a higher interest rte and monthly payment than if you wait until you have paid all of the settlements and your credit report reflects that your credit card balances are now zero.

You will also be turned down if you apply for a personal loan or another unsecured loan. In other words, if you absolutely need perfect credit and if you will be purchasing big ticket items that a higher interest rate will affect you in a large way, than debt settlement or debt negotiation is not the direction you should go.

However, if you will not be purchasing any large things like a home, boat, or vehicle, than you should seriously consider debt settlement. Once you are finished with the debt settlement program, your credit score will improve dramatically and if you implement some basic credit enhancing strategies, you will start receiving credit card offers in the mail 3-6 months after you complete the program. This time though, you will be much wiser and hopefully more careful as to how you handle credit cards.

Another con is that you have the potential of getting sued on a delinquent account. Lawsuits can easily be avoided by settling the account, but some people are scared that a lawsuit will ruin their credit report or credit score. The truth of the matter is that a settlement on any account means that this particular account is finished and settled and you can never be sued on it.

Finding a company that will assist you in the event of a lawsuit or offers you asset protection is a great way to determine if that company offers a complete type of debt relief service.

Avoid Getting Scammed

It goes without saying that you do NOT want to get scammed by a debt settlement company. Some ways to do your own due diligence when it comes to dealing with debt settlement companies include:

– Ask lots of questions, like how long the company has been in business, what type of training its employees have. You want to go with a company that’s been around and has a staff who understand personal finance.

– Avoid companies that contact you rather than the other way around.

– Read — and understand — the fine print before you sign anything.

– Most companies offer free consultations before you sign anything. Use the opportunity to ask lots of questions and avoid any company that isn’t interested in answering them.

– Settlement companies with a proven track record of getting clients out of debt will have a long line of people willing to testify to that effect. Check the Better Business Bureau to see what people are saying about the company you’re looking into.

– Ask for references from the company so you can speak with former clients of theirs. If they will not or can not offer this, run away as fast as you can. A reputable company can easily locate clients willing to share their success stories with prospective clients.

– Find out if the company has any specialization in the area of debt you have or specializes in the state in which you live. Many companies offer state specific advice because each state has different consumer protection laws and if they can help you implement those laws, it will save you a lot of money and heartache down the road.

The Alternative: Debt Management Programs

Debt settlement isn’t the only option for people who are swimming in debt. If you’ve tried debt management on your own and are still struggling and need help, you may want to consider a Debt Management Program (DMP). DMPs are often run on a non-profit basis through a consumer credit counseling service, and have no motivation other than wanting to see ordinary people get out of debt. The fees are minimal, and much lower than you’ll pay a settlement or consolidation company — and you’ll pay off your debts, typically in less than five years, without all the damage to your credit and credit scores.

Another great thing about legitimate credit counseling services that offer DMPs is that they can also help you evaluate your debt situation, and if you’re not a good candidate for a DMP, they can help you determine if bankruptcy is an option — always a last resort, but there are cases where it’s the only option left.

Before you decide on a credit counseling service, make sure they are legit. You can do this by verifying that they are a member of the National Foundation for Credit Counseling by visiting their website or by calling 1.800.251.CCCS.

Best Ways To Get Out of Debt

Using a HELOC

A HELOC, or a home equity line of credit, is a revolving line of credit secured by equity in your home. That line of credit can be tapped and used for whatever you like; to pay off debt, to buy a car, to pay college tuition, or just to have as an emergency fund. HELOCs are commonly used to pay off credit card debt because the interest is tax deductible and the interest rates are relatively low.

The danger when using a HELOC is what happens if you go into default. Because a HELOC is secured by the equity in your home the bank can foreclose on your house if you don’t pay back the loan. For some people that’s far too much of a gamble just to pay off a little credit card debt.

Using a Balance Transfer

If you’ve got good credit then you’re probably already getting offers for zero percent credit cards. These are tempting, and for good reason. Converting your expensive credit card debt to zero interest credit card debt is a considerable trade off in your favor.

Many of these credit cards allow you to transfer your entire interest accruing balances from other cards AND allow you to make new purchases, all at zero percent interest for some period of time. If you’re disciplined you can use the grace period, normally between 6-12 months, to aggressively attack the balance and get out of the debt.

Using a Personal Loan

A personal loan is an unsecured installment loan. If you’ve got good credit it’s not that hard to qualify for personal loans well above $10,000. If you use the funds from a personal loan to pay off credit card debt then your credit scores should shoot through the roof because you’ll be converting score damaging revolving debt into score benign installment debt.

As far as the cost of the installment loan, it’s possible the interest rate will be considerably lower. If you have good credit you can get an installment loan in the low teens, while your credit card debt might be as expensive as the high 20s. Plus installment loans have a much shorter payoff period compared to credit cards.

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