September 9, 2022

Is Debt Settlement the Cheapest Way to Get Out of Debt?

Having substantial debt can feel like being buried under a mountain. No matter how much money you put into your debt payments, high interest rates can mean that you are paying off debt endlessly. After a certain point, substantial debt can have a negative impact on your life. This is why debt settlement can be a good option for many people.

Is Debt Settlement the Cheapest Way to Get Out of Debt?

When it comes to paying off debt, consumers have a few options. For example, some financial experts recommend paying off low-interest debt first and then tackling high-interest debts. However, if you have substantial debt, then settling your debt may actually be a better method. Debt settlement is a strategy that allows you to negotiate directly with your creditors to pay off a percentage of the debt you owe. In general, when you use this strategy, you will have the option of a single lump sum payment to discharge your remaining debt or a payment plan for the remaining percentage of the debt you agree to pay.

What Percentage of Debt Will You Pay?

Usually, you can negotiate the settlement to pay off your debt down to 10% to 50% of what you owe to each creditor. If your debt is owed to a collection agency, you can also negotiate your settlement to this percentage range.The percentage of the debt you will pay will depend on how well your advocate negotiates, the amount of debt you owe, and the type of debt you have. For example, it may be easier to negotiate a smaller settlement percentage for debts related to medical bills than credit cards.

Why Do Creditors Agree To Negotiate Debt?

While obviously settling your debt is a huge benefit to your finances, you may be wondering why creditors agree to negotiate settlements. To be frank, creditors are more willing to negotiate settlements because at least they will get some amount of money. When creditors refuse to negotiate, this may cause consumers to file bankruptcy, which ultimately ends with the creditors not being able to claim any money.

Benefits of Debt Settlement

There are several notable benefits of using a strategy to settle your debt. For example, when you work with an agency to settle your debt, you can rest assured that the days of collection calls and wage garnishments will soon be in the past. Other benefits of this debt recovery strategy include:

Avoid Bankruptcy

Bankruptcy is typically viewed as the final option for those who have substantial debt. Many people are motivated to avoid bankruptcy because of the negative impact on their credit score and the difficulties they may have applying for home and auto loans after bankruptcy. If your primary motivation is to avoid bankruptcy, settling your debt can be a good option.

Repay Debt Faster

Whether you are using a lump-sum payment or creating a repayment plan with your creditors after adjusting your debt, you can repay your debt faster and recover your credit more quickly when you use a settlement strategy. Repaying your debt faster has a positive impact on your credit score, which can be useful if you need to apply for other loans, or you simply want to recover your credit.

Stop Collections

Stopping collections is another benefit of settling your debt. When your consumer debt is sold to a collection agency, you may be inundated with collection calls and letters that can cause a great deal of anxiety. When collections get more aggressive, you may also be facing a lawsuit from creditors to repay debt. When you can settle your debt directly with your creditors, you can stop collections.

When Should Bankruptcy Be an Option?

Although settling your debt is cheaper and often more beneficial for your overall credit health, bankruptcy is still an option for many consumers who have debt. The goal of bankruptcy is to partially or totally discharge debt that you are unable to pay without great financial hardship. Bankruptcy is a legal process, but it's also a smart financial decision that can help you recover your finances.

Debt Settlement Negotiation Fails

Although you may start settlement negotiations with creditors, the creditor is not obligated to agree to negotiations. If your creditors or collection agency refuses to settle your debts, then bankruptcy may be your only available option to resolve the debt. When negotiations fail, bankruptcy can stop collections and allow you to go through the legal process to discharge the majority of your debt.

Debt Equals Half of Your Monthly Income

If your debt equals half of your monthly income, the fact of the matter is that repaying your debt can cause undue financial hardship. Because your payments to creditors are equal to half your income, you may not have enough money to pay rent or buy food. When this is your situation, you will generally qualify for a means test for Chapter 7 bankruptcy.

Debt Takes Too Long to Pay Off

If paying back your debt on your continued monthly payment plan will take five years or more, you may also qualify for bankruptcy. This is because creditors charge interest, which means that interest rates can make it so you can never actually pay down your debt. When your debt takes too long to pay off, this can negatively impact your credit score and harm your finances.

Benefits of Bankruptcy

Although bankruptcy is a major legal and financial decision, it can ultimately be beneficial to your financial health and your ability to rebound after debt. Some of the primary benefits of filing bankruptcy include:

Halt Collections and Garnishments

When you file bankruptcy, collection calls and wage garnishments immediately stop. Any debt collection will be halted throughout your bankruptcy process, which will give you time to recover some of your finances even if only part of your debt is discharged.

Wipe Out Debt

The main benefit of bankruptcy is the ability to completely wipe out consumer debt. This can include credit card payments, medical debt, and personal loans. The ability to completely wipe out your debt will give you more financial freedom in the future since you will not have to pay creditors every month.

Which Method Should You Use?

Choosing between settling your debt and filing for bankruptcy will depend on the amount of debt you have and whether creditors are willing to enter debt negotiation with you. Ultimately, the best strategy to use may be attempting debt adjustment first, and resorting to bankruptcy if creditors are unwilling to negotiate your debt.

Can Student Loans Be Resolved With Either Method?

Many people who have substantial student loans may want to negotiate or discharge this debt, particularly if they are unable to pay student loans even under government IBR plans. That said, it is difficult to have student loan debt discharged through bankruptcy without filing additional motions. On the other hand, you may be able to settle some types of student loan debts, such as FFEL loans or Perkins loans.If you have substantial debt, it can feel like a crushing weight every month as you try to balance your finances. Instead of struggling, you may want to consider more drastic methods to relieve your debt, including debt adjustment or even bankruptcy. To learn more about your options, get in touch with Thomas K McKnight Law Office in Santa Ana, CA today.

get a free Consultation

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.