Spoiler alert: Most consumers in America are in debt.
The debt level of American citizens has run up to trillions of dollars and is expected to keep climbing. The government fears the debt crisis, and the average citizen just wants to sleep better at night. With these issues affecting the country, one method that consumers look to is debt relief.
There are different kinds of debt relief programs, from debt consolidation to debt settlement and even Chapter 7 Bankruptcy. The one you choose will be dependent on your kind of debt. However, in this article, we will study debt settlement specifically and the associated debt relief program fees.
What is Debt Settlement?
Debt settlement is a system where a negotiated settlement is made between you and your creditors so that you pay them significantly less than what you originally owed. This applies specifically to unsecured debt; credit cards, personal no-collateral loans, payday loans, store credit cards, and more.
You may be wondering, why would anyone settle for less than what you actually owe? The creditor will allow a negotiated settlement to be paid instead of the full amount when they believe you are not going to pay them back. Remember, this is an unsecured debt so there is no collateral for a creditor to repossess in order to recoup their loss. It’s better to receive part of their money than to receive nothing at all.
The debt settlement company acts as the middle-man and receives a percentage for helping you negotiate settlements with your various creditors. They set you up with an escrow account that you make monthly payments to. As the funds build, the company settles your debts for significant savings.
Many people believe that debt settlement is the best debt relief program for people with lots of unsecured debts like credit card debts. The truth is, while debt settlement is better than debt consolidation for unsecured debts, sometimes Chapter 7 Bankruptcy is the right choice. This is an unpleasant route nobody wants to travel, and your best bet is to first speak to a debt relief company to see if they can help.
How do they make money?
Now that we have understood a little about debt settlement, let’s look at how debt settlement companies charge debt relief program fees from customers. Typically, debt relief program fees should be a percentage of the negotiated settlement or a percentage of the difference between the negotiated settlement and the original debt owed.
For example, if you owe $10,000 and you approach a debt settlement company to help, they can negotiate with your creditor to a lower balance of $5000. The settlement company will generally charge you 25% on the $5000 which equals $1250. This means you end up paying $6250 to be out of debt instead of $10,000. The speed at which this happens is greatly increased as well. Paying off $10k in unsecured debts will generally take 8 to 12 years with the interest. With a good debt relief program, not only do you pay far less, it’s complete paid off in about 24 to 48 months.
This is just an example so that you can grasp the basic concept of what actually happens. Settlement companies with a good negotiation department can often settle unsecured debts for surprising amounts.
Also, debt relief companies are not legally allowed to ask for money as down payment before they settle your debt. If any debt settlement company asks you to negotiate payment before they settle your debt, that’s a sure sign that they are illegitimate.
Before you worry anymore about the ongoing consumer debt crisis and reoccurrence of the 2008 market crash, worry more about understanding debt relief and getting the best settlement you can get. Good luck.
