Are you considering debt settlement for repayment of your dues? Ever heard of debt settlement where you pay a one-time sum to be freed of your debts? Does that sound too good to be true?
Well, debt settlement is a fairly new concept in India but it is fast gaining momentum as borrowers use it to negotiate better settlement terms with creditors or lenders. However, it comes with its own set of risks.
A lot of people get tempted to seek debt settlement for quickly reducing their ongoing debt obligations. However, it’s important to note that they can end up far deeper in debt-traps or even with an adverse impact on the credit score.
Here, we share some useful information on how debt settlement works and some of the risks associated with it, so that you can decide whether it’s the right choice.
How Debt Settlement Works?
Debt settlement is also referred to as “debt relief”. Let’s say, you’re unable to repay an ongoing loan due to a financial crisis like loss of job, medical emergency, etc. In such instances, instead of letting the loan be declared as an NPA (Non Performing Asset), you can negotiate with your lender to settle the debt.
Debt settlement involves negotiating with the creditor for a single payment which is less than the total amount owed. If you’re wondering why the lender would agree to settle the debt for less than what you owe, then it’s because recovering something is better than nothing.
While it may seem like an easy way out of your debts, you have to remember that lenders do not extend debt settlement to all borrowers. They go through each case thoroughly and offer debt settlement only when the situation is genuine and the borrower is unable to repay the loan, in any other way.
As a borrower, you can also approach a debt settlement company to handle the negotiations on your behalf. These companies reach out to your creditors and negotiate better payment plans on your behalf. They help in settling or reducing your overall debt obligations. These services come for a fee which is often a percentage of the total amount to be settled in debt.
Additional Reading: Things you must know about debt management plans
Benefits of Debt Settlement
One of the main advantages of debt settlement is that the debt owed by you can go invisible from your creditor’s books. This helps you in planning your monthly budget and allows you scope for remaining settlements if any.
In case you are trying to settle a debt that has been holding a substantial proportion of your total debt, then settling the same can buy you some peace of mind.
Your monthly payments will see a fall once the debt settlement goes through positively. It can erase a significant amount of interest and other fees accrued on the total amount owed.
Risks of Debt settlement
Debt settlement comes with multiple risks. Here, we throw light upon some of them:
Creditors may not negotiate - Not only is there no guarantee that you will be able to successfully settle all your debts, but some creditors also won’t negotiate with debt settlement companies at all.
End result could be more debt - If you stop making payments on a debt, you can end up paying late fees or interest. Be prepared for a tough collection exercise from the creditor or debt collector. In case the company reaches an agreeable debt settlement, the amount of debt that’s forgiven may be considered as taxable income. This means you might have to pay taxes on the amount.
You may have to pay fees even if the entire debt is not settled - When working with debt settlement firms you don’t generally have to pay any fees till a settlement is reached. This is collected only once you’ve agreed to the debt settlement, and you are ready to make the one-time payment to the creditor. If the debt negotiator settles only a portion of your total debt, they can charge a percentage on the same amount.
It negatively impacts your credit history - This is one of the biggest risks of settling debts. When you settle a debt, it’s marked as “settled” instead of “closed” on your credit report. This has an adverse impact on your credit history making it difficult for you to obtain loans in the future.
Can You Settle Debt Yourself?
If you think that a debt settlement is ideal for you, you can choose to either do it yourself or hire a professional debt negotiator who can help you through the process. Bear in mind that your creditors are obligated to negotiate with you. On the other hand, a debt professional will not necessarily be able to negotiate a suitable deal for you. Additionally, the debt settlement market has many con artists, scamsters, etc, which is one of the reasons why many people choose to settle their debt themselves instead of hiring a third-party.
One of the main points in debt settlement is to clarify at the outset that you’re not in a good financial state. Once your lender agrees to your financial situation, they may have a better mindset to initiate the negotiations and come to agreeable terms of the settlement.
You may be new to debt settlement if your current financial situation is a first-time experience. This, however, does not mean that you don’t give debt settlement a try. To make the situation favourable for you, you must request your creditors to lower various charges, reduce monthly payments, or have an alternative repayment option. Debt settlement is all about how well you can negotiate better terms with your lender to pave the way for a stress-free repayment.