Debt settlement plan

A debt settlement program can offer hope to families or individuals that may find themselves over their heads in debt. This type of plan can be a do-it-yourself endeavor, or can be hired out to a debt settlement company. Here are some pros and cons of each.

What Is Debt Settlement?

If you stop paying on your credit card accounts for at least 3 months, many credit card companies will start to offer to settle an account for less than the total amount owed. Your account will then be considered settled for less than the full amount, but you won't owe anymore. Amounts vary, but typically they run between 20-80% of the total balance. You must pay this agreed upon amount usually in one lump sum. If you are like most people, you won't have this cash lying about. Here is where the planning comes into play.

What does a debt settlement company do?

Settlement companies will set up a reserve account that you fund monthly. Out of this account, they will pay your creditors an agreed upon amount. In return for haggling with your creditors, fielding collection calls, and setting the program up, they will often receive a fee of between 15-20% of your total debt to be settled. That is not the settled upon amount either, that is the full starting amount. So if you have $50,000 of debt, prepare to pay out $7500 in fees alone!

Going through a settlement firm is no guarantee that you will not get sued either. If you do, the settlement company most likely will simply drop you as a client.

So can I do a settlement myself?

Absolutely. In fact, many creditors will not work with settlement companies. You have to plan ahead, figure out how to fund your plan, whether through savings, tax refunds, borrowing, etc. Then stop paying your cards and wait for the phone to ring in about 90 days. You'll find that most creditors will be willing to work with you as they will at least get something verses nothing if you file bankruptcy.

Consider a debt settlement plan if you are running out of ideas on how to get out of debt. Hire a settlement company if you really don't want to handle it yourself, but be prepared to pay some hefty fees.