Being in debt is very suffocating. This is why people go for debt settlement. Debt settlement also referred to as debt negotiation or credit settlement, is a debt consolidation option in which a deal is struck with creditors for them to reduce the payment on condition that you make a full settlement of the debt you owe. Starting in 2010, for-profit debt consolidation organizations started to advertise the new method of settling credit card debts. With this option, a person would stop paying the creditors, save up the money then hire an expert negotiator to strike a deal with creditors. The practice is common in both Canada and the US.
All in all, it is good to note that the method doesn’t really work because of the following:
- When you stop making payments, the collection agencies will start harassing you.
- You can be taken to court by a creditor who wants to put a lien on your house or garnish your wages.
- Your credit rating will nosedive when you don’t make timely payments.
- Debt settlement companies will charge a huge upfront fee which is cut from the payments of the first months. This is done to cover for the lots of work they do to convince creditors to accept the lump sum you are offering. If the settlement fails, you will have more debt to deal with since you have to pay your creditors and will have lost the money you paid to the debt settlement company.
- Most banks and lenders see this method as a scam and will not deal with these types of debt settlement firms.
- The debt settlement industry has become so confusing that Nova Scotia, Manitoba, and Alberta have introduced regulations to govern it. Ontario also plans to introduce similar regulations. The focus of the regulations is to ban upfront fees, limit the amount of applicable fees, require clearly worded contracts and allowing a 10 day cooling off period for debtors to consider their decision before signing.
Prior to October 2010, Canadians handled debt settlement by getting the money, contracting creditors and offering to pay part or full balance in lump sum payments. If creditors agreed, you paid as low as 50% to 80% of the debt. Whether you are using the old or new option of debt settlement, you should stick with the non-profit credit counseling organizations.
- You repay less than you owe.
- Your credit rating will be repaired completely two years after clearing the debt. This happens when using a non-profit debt settlement organization.
- You enjoy the peace of mind knowing creditors will not harass you anymore since you will not deal with creditors directly.
- You avoid bankruptcy thus saving your credit.
- You need the lump sum of cash to pay off the debt. This is hard to get.
- For-Profit debt settlement organizations have a success rate of less than 10%. There is no guarantee of getting the service you pay for.
- It may take up to 7 years for your damaged credit rating to recover when using for-profit debt settlement organizations.
- Creditors may refuse to cooperate.
The best thing about debt settlement is that you will not be charged any interest or fees once you settle the debt before the expiry date. The debt will be legally paid for. Make sure you get everything in writing.