Debt Settlement Program – Pitfalls to Avoid

If you’ve been through a financially rough time in the last year or two you aren’t alone. With the bursting of the housing market bubble in the United States and the subsequent domino topple of the credit market and insurance companies that underwrote those credit vendors, life took an unexpectedly ugly turn for many Americans.


While your financial health might appear in disarray at the moment, you needn’t despair. As bad as things might look from where you are, debt settlement programs are a possible option for you if you have serious concerns about your liquidity.

A debt settlement program is a way of negotiating a debt settlement in which the creditors (lending agencies) in consonance with you (the borrower) agree on reducing the amount owed and regard the reduced balance as a full payment of the debt.

It may seem counter-intuitive for lenders to do that, but by debt settlement they at least assure a partial recovery of the loan, as opposed to losing all the money in case that the debtors file for Chapter 7 or Chapter 13 bankruptcy. There are many debt settlement programs around in the market – both free and paid for. But before you consider them, it is well advised to keep a few things in mind. Here are some common pitfalls to avoid:

1. Talk to your creditor: Before getting into a debt settlement program, see if you are eligible for it. If you owe a debt with attached security (like a house or a car), there is barely any sense in getting into a debt settlement program, since the lender would just ask you to forfeit the attached security instead of settling for a lower payment. As long as you are capable of monthly installments, even if that means cutting corners at home, your creditor won’t consider debt settlement an option.

2. DIY, but be careful: There are many do-it-yourself debt settlement programs available online. They are generally comprehensive enough to take you step by step through the debt settlement process. However, be sure that you read the fine print on every action you take when dealing with the lending agency. Most creditors want a lump sum amount to be paid if a debt is reduced. If such a payment is a body blow to your finances, don’t get yourself into more trouble. Explore other options instead.

3. When in doubt, hire a lawyer: Every debt settlement program has its consequences, be it in your credit reports or your taxation. If you are a rookie at finance and taxation law, it is good idea to consult your lawyer even if you are undertaking a DIY debt settlement program. The lawyer can take care of the fine print and see to it that there are no loopholes that might get back to you later. Also, chances are that your lawyer knows the ropes of negotiations better than you. So don’t take an ill-informed decision; it may come back to haunt you.

4. Don’t be duped by companies: Many debt settlement companies offer debt settlement programs by negotiating with your creditor. Please know if the debt settlement program that you are paying for is legit or not! As a thumb rule, avoid buying debt settlement programs from companies that demand a large amount of cash upfront for the settlement. As far as possible, look for debt settlement programs that charge a smaller fee in the beginning and ask for a fixed commission on the debt reduced based on a mutually agreed percentage beforehand. It is worth reiterating that when in doubt consult a lawyer.

5. Tie up the loose ends: Once you have successfully gone through a debt settlement program, revise your financial plans and clear up any residue that may be left of your bad debt. If you bought your debt settlement program from a company, ask about “credit repair” programs that will help remove your bad credit history. Further, keep up-to-date on your taxes. The IRS has different guidelines that may vary from case to case. See where you stand and clear up all your dues.

A well executed debt settlement program will do wonders to your financial health. While it isn’t an easy recourse, it provides relief if you are eligible for it. The key factor is to follow the program through and then, more importantly, restore normalcy on your financial records. Good luck!

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