What is debt settlement?
Are you just starting on your path to financial freedom? Taking the first step to pay off your debt can be overwhelming. You either feel like you’re out of options, or there are too many to choose from. We’re here to help.
If you’ve gotten behind on your payments or are just trying to keep up with minimums, there are a few options for getting your financial health back on track. And one of them is debt settlement.
What is debt settlement?
First things first: Debt settlement is when you come to an agreement with your creditor to pay less than what you owe.
It’s also a type of debt restructuring. It’s easy to confuse these concepts, so you’re not alone. To put it simply, debt restructuring is the all-encompassing term for whenever a deal is negotiated with a creditor.
How does debt settlement work?
To settle your debt, you need to reach out to creditors to negotiate a deal. You can work with them directly to restructure your debt or partner with a debt settlement company that will speak on your behalf.
If you’re feeling overwhelmed, partnering with a debt settlement company is the first step toward debt freedom. They’ll often provide a free counseling call to see which options are right for you. If debt settlement is the way to go, they’ll walk with you on the path to financial freedom.
Why is it better to work through a debt settlement company? Here are just a few of the benefits:
- Lean on their expertise: Creditors are intimidating, and negotiating with them is a challenge. Debt settlement partners are experienced negotiators. They know what points to make and which buttons to push to get you the best deals.
- Save time: Your time is valuable. Partnering with a debt settlement company means you don’t have to track down your individual creditors and spend time working with each one.
- Get peace-of-mind: Know that you’re getting the best deal possible and that you’re on your way to freeing yourself from the weight of debt.
When you work with a debt settlement company, the responsibility is off your shoulders. You’ll work with experts who know what arguments to make and what to ask to get you the most savings.
There are a few catches that come with it:
- You typically have six to 12 months to pay off the newly negotiated debt. However, a creditor is more likely to come to an agreement when you can pay the whole amount upfront. That way, they get their money quickly and don’t risk any more losses. Between purchases, late charges, and fees, this often adds up. Alternatively, you might be able to negotiate a six- to 12-month payment plan, but it can leave you with higher monthly payments than you’re prepared to pay.
- You’ll have to stop paying your credit card debts. Banks and other creditors have limits on when and how they can talk about settling your debt. Negotiations don’t happen until your account defaults and moves to collections, which typically takes 180 days (six months).
- Instead, you’ll make deposits into an escrow account. Once you have six months of payments into this account, the negotiations can begin. This money will eventually go toward your debt payments.
What if I can’t afford the payment?
You’re not alone. Six to 12-month payments are common, but if you need more time to repay, LendStreet can help. When you work with LendStreet, we’ll offer you a new loan to cover your debts in full.
Now, you have one lower monthly payment that never changes, and you have an end date in sight.
What’s the difference between LendStreet and a debt settlement company?
While LendStreet isn’t a debt settlement company, we work with them to give you the best chance at debt freedom.
Debt settlement companies will work between you and creditors to agree on how much of your current debt you’ll need to pay. Once you settle, LendStreet can provide a new loan to pay off that debt.
Now, you’ll have ended your relationship with your creditors and have a new, more manageable loan with LendStreet.
What are the benefits of debt settlement and working with LendStreet?
When you partner with LendStreet to settle your debt, you open yourself up to many advantages.* Here are just some of the benefits of debt settlement:
- Lower monthly payments
- Work with a single lender for your settled debt
- Money goes directly to settle your debt—it doesn’t pass through you or your bank account
- You stop accruing interest
- This is an important one. If you continue paying your monthly minimum payments, you won’t just pay what you owe today. Every day the total amount isn’t paid, creditors add interest to your balance.
How does a credit card consolidation loan compare?
Now that you’ve learned about debt settlement, what about those other choices? Credit card consolidation also seeks to help those who have fallen on difficult financial times.
A credit card consolidation loan helps if you have continued making monthly payments but need help paying off your debt. You can take out a credit consolidation loan at a lower interest rate and use it to pay off your high-interest credit.
However, there are a few drawbacks:
- You’ll likely have higher monthly payments.
- You generally need good credit to get a credit card consolidation loan.
- You’ll likely have to pay off your full debt (the banks won’t negotiate at this point)
- You receive the money and are responsible for using it to pay your creditors.
Unlike debt settlement, you still have to pay all that you owe to your creditors with a credit card consolidation loan.
What is credit counseling, and how does it work?
Credit counseling is offered by debt management platforms (DMPs). They assess your financial situation and provide several services to help you pay off your debt. The service they offer that’s most similar to debt settlement is a debt management plan.
A debt management plan consolidates your debt into one monthly payment, like a debt settlement plan. Although a counselor will also attempt to lower your interest rates with your creditors, you’re still required to pay the full loan amount.
What about bankruptcy?
Bankruptcy is another option for debt relief. However, it can have longer-lasting penalties than other options, like debt settlement.
There are two types of bankruptcy for individuals: Chapter 7 and Chapter 13.
Chapter 7 bankruptcy discharges most of your debts, but there are some exceptions. Here are some things to think about when considering Chapter 7 bankruptcy:
- It doesn’t wipe out student loan debt, taxes, or child support obligations.
- If you have a cosigner on any loans, it makes them solely responsible for it.
- It stays on your credit report for up to 10 years.
- You may have to give up property, depending on your state.
- Attorney fees can add up.
- Not everyone qualifies.
Chapter 13 Bankruptcy helps you restructure your debt based on your income and may eliminate what’s left at the end of the term. However, as with the case of any bankruptcy, there are some severe drawbacks.
- Your payments can increase as your income increases.
- It stays on your credit report for up to 10 years,
- Future lenders put more emphasis on past bankruptcies thank other debt solutions.
- Attorney fees are high (typically higher than when you file a Chapter 7).
- Not everyone qualifies.
We’ve broken down your options for easy comparison across debt consolidation.
|Credit Consolidation Loan||Credit Counseling||Chapter 13 Bankruptcy||Credit Card Minimums|
|What Is It?||Work with a partner to restructure your credit terms & get a loan with LendStreet to pay off the debt||Open a new loan to pay off your existing credit card debt||Work with an agency to consolidate your payments and possibly restructure credit terms||Work with an attorney to renegotiate debts based on your income||Continue paying minimums without adding additional debt onto the card|
|Time to Payoff Debt
(for $15K loan)
|48 months||48 months||60 months||48 months||25 years|
|Estimated Monthly Payment
(for $15K loan)
|Credit Impacts||Typically rebounds by 100 points in 18 months||Depends on account history||Depends on account history||10 years||Depends on payment history|
What if you do nothing at all?
This depends on your situation.
If you’re current on your credit cards…
Making minimum payments is an option—but not a very good one. Even if you stop using your cards completely, it could still take you years to pay them off. And you won’t just pay what you owe now. As long as there’s money on the card, you’ll be paying interest on that debt.
If you’ve been unable to make payments…
We know it’s tough, but ignoring debts can lead to severe consequences. Those collection calls—they won’t stop. And the worst-case scenario is that the creditors take you to court, which could lead to long-term wage garnishment.
We know, we threw a lot of information at you. But we want you to know that even if you don’t feel like you have options, you do.
If you’d like to hear more about your debt-relief opportunities, talk to one of our financial experts <contact link>.
Or if you’re ready to pay off your debt and reach your goals, click here to get started <get started link>.
*Note that advantages are not guaranteed, and each person’s debt settlement experience is unique.
We know, the finance industry practically has its own language! Let’s cut through the jargon with this helpful glossary. You’ll be a pro in no time.
Accrue: To accumulate over time. In this case, we’re talking specifically about accumulating interest. Say you have $100 with 15% interest. In the first month, you’ll owe $100 + 15% = $115. But the following month, you’ll owe $115 + 15% = $132.25. The longer your debt accrues interest, the more you’ll pay.
Creditor: A creditor is a person or business you owe money to. In this case, it can be your credit card company, a collection agency, or other financial institution.
Wage garnishment: A court mandate that takes up to 25% of your income out of your paycheck to pay off your money obligations.
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