You have lost control of your debts and see no way to pay them off on your own. So you’re thinking about going the debt relief route, which is a way for you to settle with your creditors and start afresh. Beyond that, you’re a little fuzzy on the details. To help you, here are the main debt relief details you should know.
What is Debt Relief?
Also known as debt settlement, debt relief involves you hiring a company such as Freedom Debt Relief who specializes in negotiating with creditors to come up with a sum less than what you owe so that your debts are marked as “settled”. Why would creditors settle for less? Well, they understand that if they say no, you might go broke, in which case they might get nada.
Now you can, in fact, pursue debt relief yourself. However, it is usually easier and faster to seek the services of a professional debt relief company. This is what we focus on here. Also note that debt consolidation in California — and elsewhere, for that matter — doesn’t really work if you have bad credit or a high debt-to-income ratio.
How Debt Relief Works
You will have a consultation with a company representative who will assess your situation and come up with a plan just for you. Then the funds that would normally go directly to your creditors each month will instead be deposited into a special savings account.
Once you have saved enough, your negotiators will attempt to reach an agreement with each of your creditors that will allow you to make a single payment in full to settle your obligation. You will be asked to sign each agreement, so there will be no surprises. Once you do, the creditor will be paid from the savings account and the debt relief company will receive their fees. Freedom Debt Relief, for example, charges 15-25% of the amount you save.
Note that debt relief companies deal with unsecured debt, which is not tied to collateral. If a secured debt is past due, lenders can simply sell the affected asset to recoup their investment. So, usually, debt relief usually involves credit cards, personal loans, and medical bills. Debt consolidation in California, or elsewhere, may be an option, but only if credit scores are there for a lower rate.
You must also be significantly behind on your bills for a lender to consider a settlement offer. In other words, if you’re up to date, or maybe late with a payment, your offer probably won’t fly. Also, many debt relief agencies require a certain minimum amount of debt before taking your case.
Possible Disadvantages of Debt Relief
Note that you will be asked to save money instead of paying creditors directly. This will lead to collection calls and a substantial drop in your credit scores. However, you are probably already receiving such calls and your credit scores at this point have seen better days.
Once you’ve settled your debts — in about two to four years — you can start rebuilding your credit. If you were to make minimum payments on your debts, it would take years, if not decades, to clear your balances.
There is also a small chance that a creditor will reject your offer. If this is the case and your other creditors agree with the settlements, you can deal with that creditor yourself as you see fit.
Also, the Internal Revenue Service may consider your canceled debts as income. Talk to your tax professional about this before agreeing to the settlements.
So these are key debt relief details that you need to know to help you solidify your position. Although the strategy is not for everyone, it has certainly helped dozens of people regain their financial balance.
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