When to Avoid Debt Settlement

Debt settlement allows you to pay off an existing loan with lump-sum payment that is lower than the total amount you owed. The lender agrees to this lower amount in exchange for the guarantee of a quick cash payment. Debt settlement is an option for almost many people with extensive personal debt, but that does not mean it is the right option in each case. In some cases, you will benefit from alternative means of paying off the debt.

Your Debt is Not Large Enough

If your debt is small, you have very little to gain through debt settlement. You should evaluate your debt as expressed of a portion of your total wealth. Mortgages do not usually count in this figure because many people owe more on their mortgage than they have in home equity. Determine the total worth of your other assets, including cars, electronics, jewelry, savings and investments. Most debt settlement options will only be available if your debt is close to 20-30% of your total assets. If you are very asset-rich however, you may consider debt settlement if your debt is above a certain value such as $20,000 or $30,000. Only you can determine how much debt is too much.

You Can Pay Debt Off in another Manner

Do not consider debt settlement if you can make the payments on your own over time. If you have assets you are able to release in order to gain the liquidity do make monthly payments, you will benefit in the long run. Similarly, if you can spend less money each month and pay more of your debt off, you are better off paying the debt yourself.

Paying the debt owed yourself is a better option than a debt settlement because your credit score is negatively affected by debt settlement. Lenders do not like when you break the terms of your original contract by paying off debt early or at a lower sum than you owe. They will accept this in extreme cases, but it will cost you on your credit score. 

You Qualify for Bankruptcy

Bankruptcy is a legal protection for consumers to recover from debt and rebuild financial health. Although it is a scary option for many, it may be the right option. If you legally qualify for bankruptcy, your debt to asset ratio may be too far beyond repair for debt settlement to truly solve your problems. You need immediate liquidity for debt settlement, and most people who qualify for bankruptcy do not have this.

Furthermore, once you file bankruptcy, your lenders must legally stop contacting you and allow judges to decide how to portion out your funds. Judges will negotiate the settlements for you, and you will usually end up paying less than if you negotiate the terms yourself. Meet with a bankruptcy attorney if you think you may qualify. Attorneys can advise you which method would save you more money in the long-run.


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