What is Debt Settlement?

Debt settlement negotiation is a way to achieve financial relief when you become past due or are unable to make payments on your current debt. If you do not qualify for bankruptcy or are trying to avoid it, debt settlement may be the right option.

What is the Debt Settlement Process?

Debt settlement is a form of debt relief in MN that involves negotiation with your creditors to pay a reduced amount for the debt that you owe. That might include reduced payments, or one lump sum amount lower than the total amount you owe to the creditor.

To achieve a settlement with your creditors, your debt settlement attorney must first present an offer. If you are already behind on payments, the creditor may be more likely to accept the settlement because they will be worried that if they do not settle, they will not receive anything at all.

Once your attorney makes an offer, the creditor or debt collector may accept or reject the offer. In some situations, they will make a counteroffer that is a higher amount of money. Your debt settlement lawyer can help you determine how much you can afford to pay through a repayment plan or lump sum amount.

Is Debt Settlement Right for You?

Debt settlement is right for some people and not for others. You should consult a lawyer for debt settlement to determine if it’s the best path for you. It is crucial to know the positive and negative aspects of debt settlement before you decide on this option.

Pros of Debt Settlement

Some of the best aspects of debt settlement include:

  • You can pay less than you owe on your debts
  • You can avoid bankruptcy
  • Your creditors will stop harassing you for full payments
  • You will get relief from your debt faster than if you struggled with payments
  • Your debt won’t be sent to a debt collector or charged off
  • You can avoid being sued for your debt

Cons of Debt Settlement

Some disadvantages of debt settlement that you should be aware of include:

  • You may have to pay debt settlement fees or legal fees
  • It will likely affect your credit score
  • There may be tax implications
  • Creditors may refuse your settlement offer and demand immediate repayment
  • It can take time to go through the debt settlement process

What Types of Debt Is Eligible for Settlement?

Nearly all types of debt are eligible for settlement. However, creditors may not accept your debt settlement offer, especially if you are current on payments or the debt is secured. In those situations, the creditor may see accepting less money than you owe as less beneficial to them. They may choose other options, like repossessing your property if it is secured debt.

Some of the most common types of debt that are settled include:

  • Medical bills
  • Credit cards
  • Personal and business loans
  • Home loans (to avoid foreclosure)
  • Car loans (to avoid repossession)

Unfortunately, student loans are rarely settled. However, if you are past due on a private student loan payment, then the creditor may be willing to take a reduced payment plan or lump sum payment.

How Does Debt Settlement Impact Your Credit?

It’s important to know that debt settlement may lower your credit score. Creditors will likely report that your debt has been settled for a lesser amount than you owed. However, it will likely have less of an impact than bankruptcy. Debt settlement is much better than ignoring a debt.

Debt settlement shows future creditors that you at least tried to pay a portion of your debt, and it is possible to recover from it financially.

Watch Out for Debt Settlement Scams

When you’re looking for debt settlement assistance, you should work directly with a lawyer for debt settlement. Avoid non-legal agencies that claim they can do the leg work for you—many of those firms make the situation worse or amount to debt settlement scams.

Non-legal debt settlement agencies often charge large fees and hold your money in an account while they take an extensive amount of time to settle your debt. This can cause you to become even more in debt while you wait for them to create a settlement agreement with the creditors.

Creditors are reluctant to work with non-legal agencies as well. They know that these agencies are scamming consumers. By contrast, creditors are very motivated to avoid legal issues when you work with a debt settlement attorney.

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