5 Myths About Debt Settlement That Could Cost You Money

Key Takeaways
  • Not everyone qualifies for debt settlement.
  • Debt settlement is a lawful and legitimate way to obtain relief from high-interest debt.
  • Complex laws govern the industry and regulate what companies can and cannot do.
  • Companies may advertise savings that result in paying pennies on the dollar. But those pennies often add up to thousands of dollars when you have significant amounts of debt.

Achieving relief through debt settlement can eliminate bills from high-interest accounts within a few years.

While it is not a “get out of debt without paying creditors” card, it is a legal and legitimate way to alter the terms of a contract when your financial circumstances change. Unfortunately, a lot of misinformation about debt settlement could dissuade you from choosing this route when it could genuinely provide the debt relief you seek.

Here are a few of the most common myths about debt settlement:

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Myth #1: Everyone Qualifies for Debt Settlement

Fact: Creditors such as credit card issuers are not legally obligated to accept a reduced payoff on an account.

Lenders providing unsecured accounts face several challenges when dealing with debt collections. Due to the lack of collateral, companies have limited ways to force you to pay. To mitigate this risk, companies charge high-interest rates and hefty fees when you miss a payment.

On the other hand, when it becomes apparent that you cannot continue making payments, they are motivated to negotiate a new agreement, even if it means accepting less than the total amount owed. The alternative could be receiving nothing at all without utilizing legal channels.

To qualify for debt settlement, you must face a financial hardship that prevents you from repaying the creditor in full. Most situations resulting in reduced income or increased expenses qualify. A job loss, medical illness, or divorce are common life events that create circumstances that require negotiating existing debt balances.

Myth #2: Once the Creditor Sells the Account,It’s Too Late to Negotiate

Fact: A creditor will charge off an account when it becomes seriously delinquent. However, a charge off does not alter your obligation to repay. Creditors retain all legal remedies to pursue payment, including hiring a debt collection agency, selling the account, or taking you to court.

Negotiating a lower payoff will often prevent legal action against you, save money by altering the original loan agreement, and reduce the amount you owe.

Myth #3: It’s Easy to Settle Debt on Your Own

Fact:There are two options when considering debt settlement as a path to debt elimination: hire a professional agency or take the DIY route.

Choosing the DIY route requires navigating an industry filled with regulations and unspoken rules you must follow. Creditors adhere to federal and state laws you are unlikely to understand fully. Collection agencies use sophisticated algorithms to decide when and how much they will reduce the balance with the goal of extracting the maximum amount of money while securing the payment demanded.

Professional agencies consistently work with all major creditors and have expertise in both the laws and industry practices. Agencies understand when and how to get the best deal and lowest settlement, saving you both time and money.

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Myth #4: You Can Always Pay Pennies on the Dollar Through Debt Settlement

Fact:Debt settlement does provide discounts ranging from 20 to 80%. The amount you will save depends on factors such as the level of delinquency, the amount owed, the creditor, your income and assets, and your state of residence.

The other important thing to understand is that even significant discounts on high amounts of debt add up to thousands of dollars. For example, if you owed a total of $50,000 and received a 50% discount, you must still pay $25,000 to eliminate the debt.

Myth #5: Debt Settlement Companies Charge So Much You Won’t Save Any Money

Fact: Debt settlement companies charge a percentage of the enrolled debt and receive payments for services as they negotiate new loan terms. In most cases, agencies charge between 20 and 25% of the amount enrolled and reduce your payments by up to 80%.

  • How much can I save negotiating debts?

    It is possible to decrease the amount owed by up to 80%. However, most creditors will agree to reduce your payoff between 30 and 50% when working with a debt settlement company.

  • How much does it cost to hire a debt settlement company?

    Debt settlement companies charge a percentage of the enrolled debt. You make monthly contributions to a dedicated savings account, and the companies receive payment when they successfully settle accounts.

  • When is debt settlement a good idea?

    Debt settlement may be a good relief option when you face a financial hardship that prevents you from repaying unsecured debts in full. However, you must earn enough to set aside funds each month for debt repayment.