You may have a lot of stress if you are carrying around past-due debt. At best, multiple late or missed payments can result in a damaged credit report and a lawsuit at worst. But should you pay a charge off in full or negotiate a debt settlement?
How To Settle an Overdue Debt
When you settle a debt, the creditor agrees to accept less money than what is actually owed as a final payment. Settlement can free you from the crushing weight of debt and allow you to start rebuilding your credit score.
Negotiating with a creditor can help borrowers avoid filing for bankruptcy, which can ultimately damage a credit report. A settlement benefits the creditor because they obtain some of the unsecured debt owed.
There is no baseline for a settlement amount. However, many credit card companies refuse to accept settlement amounts less than 75% or 85% of the total debt. But if you can only provide a small lump sum payment, don’t feel discouraged. It is possible that a creditor or debt collector will accept as little as half of the outstanding debt—or even less! If a collection agency owns the debt, you may have a better chance of reaching a low settlement amount.
To make a settlement offer on your own, you will need to contact the credit card issuer. Financial experts advise borrowers to use written communication, so there is a paper trail. Having physical proof of negotiations can help you if the lender disputes any settlement terms.
Once the lender receives your offer, they will accept the settlement amount or make a counteroffer. Do not feel discouraged if you cannot afford to pay the counteroffer. Do not feel obligated to accept any terms you cannot reasonably pay. Providing proof of your income and
If you reach an agreement with the original creditor, ask for a written agreement. Once you have received a document with the settlement details, you can send your payment to the creditor. If a lender does not give you written verification of payment, you may ask for it. After making a settlement payment, review your credit reports from all three credit bureaus. The credit bureau will mark the account as “settled” or “closed.”
What Is a Debt Settlement Company?
There are debt settlement programs that promise to erase or reduce the amount of money a borrower owes to creditors. These settlement programs typically cost a small percentage of your outstanding debt, about 15% to 25%. This may sound like an ideal solution if you feel like you are drowning in debt, but it may actually be detrimental.
Debt settlement companies pay creditors in one lump sum payment. However, to obtain the money necessary, a debt settlement program will ask borrowers to set aside a certain amount every month for 36 months or longer. This money is held in a savings account until enough has been saved to pay off a settlement. Unfortunately, many people drop out of debt settlement programs because they cannot afford the required monthly payments.
Many debt settlement programs encourage borrowers to cease making payments to creditors so they can commit to saving money for a settlement. However, this can ruin your finances. Late fees can accumulate, and a debt collector may file a lawsuit against you.
Risks of Debt Settlement
If you want to be free of your crushing debt altogether, you may lean towards acquiring a debt settlement. However, there are financial risks associated with a debt settlement.
If you work with a debt settlement company, you will have to pay service fees. A service fee can be as high as 25% of the original debt amount. If you initially took out a $5,000 loan with bad credit, you will owe a $1,250 service fine!
A Damaged Credit Report
Negative information on a credit report can remain for several years. A “settled” account is a delinquent account that will stay on a credit report for seven years.
The start of seven years begins on the date the account first became delinquent. However, if there were no late payments on the account, the beginning of seven years begins on the date the debt was settled. A credit bureau will remove the account from your credit report at the end of seven years.
Negative information on credit reports can make it difficult for a person to qualify for loans and housing. Loan offers may be less than ideal, resulting in low loan amounts and high-interest rates.
A Decreased Credit Score
Credit scores become damaged when a borrower does not pay the total amount of debt. A settled account is an unpaid account, so your credit score will decrease as a result.
If your credit card account has late payments, your credit score is further affected. Payment history is the most crucial factor for credit score calculation, so you may notice a significant drop. However, as time passes, the adverse effects of a settled account will lessen.
How To Settle Credit Card Debt in Full
Paying a charge off in full is beneficial because you can start repairing your credit history sooner and avoid the risk of a debt settlement. If you do not currently have enough money to pay off a charged-off account in full, financial options are available.
Debt Consolidation Loan
When borrowers face a charge off, they often settle between debt consolidation or a debt settlement. Debt consolidation allows you to combine multiple debts into one monthly payment. Applying for a poor credit installment loan can help you get enough money to pay overdue debts and get manageable repayment terms. Paying monthly bills on time can actually improve your credit score over time, so you can use a debt consolidation loan to your advantage.
Nonprofit Credit Counseling
If you need help paying a charged-off debt in full, there are helpful counselors at nonprofit credit counseling agencies. A credit counselor can provide financial consultation and help you create a debt management plan. Suppose you do not have stable financial management skills. In that case, a credit counselor can help you organize your finances and make financial goals.
A balance transfer is a credit card transaction where you move an unpaid debt from one account to another. Suppose your overdue debt has high-interest rates. In that case, a balance transfer can help you get lower interest rates that make repayment easier. However, it may be challenging to qualify for a new credit card with a zero-interest introductory period if you have a charged-off account.
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