A debt settlement plan is a consolidation plan that basically provides lender forgiveness on portions of the unsecured debts owed, usually credit card debts that have been sold to outside collection agencies for pennies on the dollar. Consumers who have reached the point where they are simply unable to afford regular monthly payments can seek bad credit settlement solutions for economic relief through debt negotiation.
Lenders – forgive – the majority of the consumers total balances due via negotiations made on behalf of the consumer by the third party debt settlement agency. Debtors are placed on a new payment plan based on the amount of debt they owe and the estimated pay off time frame, usually between 24-36 months. The new monthly payment also coincides with the consumers financial analysis or household budget to ensure they can afford the program and successfully complete the payment plan.
In a settlement plan, creditors are not paid monthly. The consumer is required to make monthly payments to the settlement agency and funds are held in a trust account in an effort to build up an agreeable amount over time to offer in a proposed settlement pay off with the original creditor.
Accounts must be in a charged off status to begin settlement negotiations. An account –charges off – when it has gone 5 to 6 months consecutively without any payments. After said time period, the creditor writes off the debt and usually sells it to an outside collection agency for pennies on the dollar. Once an account is charged off it remains as a negative blemish on a consumers credit report for seven years. Paid in full or not, the negative mark will remain for seven years.
In noting such, it is understood that debt settlement is not for everyone. A settlement plan is best suited for those who simply cannot afford their monthly payments or have fallen severely behind on their monthly payments. Debtors who are thinking about filing bankruptcy could also consider settlements as an alternative. While a bankruptcy remains on your credit for 10 years, charged off accounts from a settlement plan only remain as negatives for 7 years.
If a debtor is just a few months behind a general debt consolidation credit counseling plan should be sought for debt elimination. Consumers who are current and want to stay current to maintain a positive credit rating could also consider debt consolidation credit counseling services over a settlement plan to eliminate their debts faster while still building their credit score.
Basically, a settlement plan is only truly beneficial to those consumers who are behind in payments more than 5 months or are looking at bankruptcy but would like to avoid filing.
Like most consolidation plans only certain types of accounts can qualify for a settlement plan. Credit card, medical, and personal loans are the most common type of monetary dilemmas that can be settled. However, secured loans, mortgages, and car loans can’t be settled because anything a creditor can acquire as collateral is considered off the table. Student loans also cannot be settled.
It is best to work with an industry professional to help assess how a settlement plan could help you be debt free or what other options may best suit your individual needs and long term credit goals. Most non profits employ certified credit counselors who provide a free financial analysis, budget counseling session, and consolidation quote without any commitment from the consumer inquiring. These agencies can be easily found online but be sure to find a company that has client reviews and testimonials from their own experience as there a lot of scam companies out there as well. It is always best to check a company out with the Better Business Bureau before providing any paperwork or banking information locking you into a consolidation plan.