Should I opt for a debt settlement agreement?

It is very likely that you have seen many ads from companies that offer debt relief services through the facilitation of a debt settlement agreement. They promise to make your monthly debt servicing burden much smaller than currently it is. If you have considerable credit cards or loan debts, you could be tempted to have a closer look, but should you accept it?

WHAT IS A DEBT SETTLEMENT?

It is a type of agreement by which debtor and creditor agree that debtor pays a lump sum which is a fraction of the outstanding debt, instead of continuing to pay scheduled periodical amounts. Such an agreement is usually initiated by debtors in case that they are not able to continue paying off their debt.

But sometimes creditors can initiate it as an effort to recover at least part of what is owed to them.

HOW TO INITIATE IT?

The very first thing you should do is stop paying off your debt. After a certain number of missed payments, your creditors will be inclined to start informing you that you are overdue with your payments and to threaten to sue you. This is a moment when you can propose them a settlement.

In case that they estimate that for them it is the best they can get, they might accept it. Unfortunately, they may be inclined to believe that it is a ruse on your behalf, and may sue you or sell your debt to a third party, most often to a debt-collection company.

DOES SUCH SETTLEMENT IMPACT THE CREDIT SCORE?

Yes, because you will have to stop paying your installments. The accounts you have settled remain up to seven years on your credit report and will impact your rating negatively. But settling debt can be much better than not paying off debt at all.

Additionally, if you are planning to get a loan for some major purchase, such as a house, you will be requested by your new creditor to free yourself of all and any delinquent debts.

IS IT BETTER THAN CONSOLIDATION/REFINANCING?

It can help you get rid of the financial burden quicker. Consolidation or refinancing can help you decrease the amount of interest or payments you are paying on your debt, but often at the expense of prolonging the period of debt payments.

Which one is better depends on the exact situation you are in, and what are your future financial plans.

CAN YOU BUY A HOUSE AFTER SETTLEMENT?

Yes, in general, you will be able to get a mortgage and purchase a home after it. Most of the potential creditors will actually request from you to first deal with any delinquent debts you may have before even taking you into consideration for applying for a mortgage.

Also, you must keep in mind that the settlement will impact your credit score negatively, and thus decrease your chances of getting a mortgage.

Settling your debt can be a quick way out of financial difficulties for some people. But you should be aware that it comes with several drawbacks that can negatively impact your future plans. Whether you should reach for it as an option depends on your exact debt circumstances.

Alex