If you are retired, or close to retirement, having debt can be one of the biggest stress producers in your life. At a time when you planned to relax, travel, spend time with family and enjoy your hard-earned freedom, debt (credit card debt in particular) can ruin your financial situation and force you to sit on the sidelines.
In this article, we are going to discuss debt settlement programs in detail. If you’re considering using such a program, this is a good place to start your research. We’ll help you understand what debt settlement programs are, how they work, and how they may or may not help you. We’ll also recommend a few companies that specialize in helping people like you manage or eliminate debt and the stress that comes with it.
What is a Debt Settlement Program?
A debt settlement program is essentially a way of writing off your debt without paying it all off. Instead, you agree to pay a percentage of the total debts you owe as a lump sum or regular monthly or quarterly payments (usually into an escrow account.)
In exchange, your creditors – such as banks or retailers, agree to let you off the hook for the rest of the money you owe them.
You can negotiate and arrange a debt settlement arrangement with your creditors yourself or with the help of a dedicated debt settlement company.
How Does a Debt Settlement Program Work?
Debt settlement is all about negotiating a payment plan which works for you and your creditors. If you use a debt settlement company, one of their expert advisors will help you arrange a workable payment plan with your creditors. Often you can get better terms by using a firm dedicated to providing this service (instead of trying to do it yourself.)
You should first assess your financial situation by taking a look at your monthly income (from your 401(K), business, or job, for example) and your expenses. This total will allow you to roughly determine how much money you can afford to pay towards settling your debts per month.
Alternatively, if you have significant savings, it might be better to pay off the agreed amount as a lump sum. This can be far more cost-effective than paying it off bit by bit, as you won’t continue to occur interest on the outstanding money you owe.
Regardless of which payment plan you go for, you will then need to transfer the money into an escrow account – just once if you’re paying it off as a lump sum, or every month. It will then be transferred to your creditors.
If you decide to pay it off little by little, you must keep on top of your payments to ensure you don’t fail to meet your obligations and potentially risk the debt settlement program becoming void.
Suppose you feel that you may have to miss a repayment for a specific month – due to an unexpected large expense, for example. Then you must notify the debt settlement company as soon as possible so they can try to persuade your creditors to make an exception.
Most creditors are reasonable, as it is in their best interests to keep the deal alive. They know they could risk getting nothing if the settlement program falls apart, and you decide to pursue other options, such as filing for bankruptcy.
Why is Debt Settlement Important For Baby Boomers?
Debt settlement can be an excellent way for adults of all ages to get their finances in order, but it can be especially important for Baby Boomers. Here’s why…
Writing Off Debt Before Retirement
If you’re approaching retirement and have a considerable amount of debt, it’s important that you somehow unburden yourself from it – through debt settlement or other means.
One reason is that it’s almost certain your income will fall when you retire, which will make paying off your debt or only meeting the minimum interest payments more difficult.
Also, getting rid of any monthly interest payments will leave you with more money to spend on things like Senior Housing and traveling during your retirement.
Reduce Financial Stress
Managing debt (and personal finances in general) is stressful for everyone, so unburdening yourself from debt is strongly advisable from a mental health and general well-being perspective, as well as, the potential financial benefits.
One common but risky strategy some Americans use to service their debt is to take out other loans to pay off their existing debt.
This is a risky and often costly strategy, as you sometimes end up with loans that are charging a higher rate of interest than the ones you previously held. As the previous loans may have damaged your credit score and the only creditors that would lend to you now charge higher rates.
It can also easily become a cycle which not only causes your debt to balloon but also leaves you feeling increasingly more stressed.
Avoid Debt Collections
If you don’t meet your repayments for several months, your creditors may refer you to a debt collection agency. Their agents sometimes use intimidating tactics to get debtors to pay up.
If you’d rather avoid this confrontation and want to break free from debt, then start considering your debt management options sooner rather than later.
What Are the Benefits of Using a Debt Settlement Program?
While debt settlement isn’t always the best option, it does offer a few important benefits – and it might be the best way forward for you.
Reduce the Amount You Owe
As mentioned, debt settlement can often save you a bundle of cash as you may only need to pay a fraction of the amount you owe. If your debt settlement agreement is particularly favorable, you could get as much as 80 percent of your debt written off!
Eliminate Debt Faster
In many cases, a debt settlement plan allows you to become debt-free much more quickly than you would if you had to pay the full amount or if you simply continued only to pay the minimum repayments and interest charges.
Limit Interest Fees
This point ties into both of the points mentioned above. By getting debt-free more quickly and paying off less than you owe, you can save a considerable amount of money by limiting your interest rate charges.
Even if your debt is relatively cheap, say just a few percents in interest per year, it can quickly add up, especially as the debt and associated charges compound over time.
What Are the Cons of Using a Debt Settlement Program?
As with anything, debt settlement is not without its drawbacks. It’s vital to give the points below some thought and weigh them against the benefits mentioned earlier.
You should also consider what other debt management options other than debt settlement are available to you to decide if there’s a potentially better alternative.
It Can be a Lengthy Process
Debt settlement usually takes between one to four years, so it’s certainly not a quick fix to your debt problems, though it can sometimes take just a few months.
It Could Hurt Your Credit Score
As debt settlement often involves you deliberately missing repayments to gain some leverage against your creditors to encourage them to settle, it can hurt your credit score.
This lowered credit score, in turn, will make it difficult or impossible for you to get credit in the future, potentially including mortgages and even small personal loans.
You May Not Save Money
While debt settlement often allows Baby Boomers and other debt holders to save money by negotiating a deal with favorable repayment terms, this isn’t always the case. If negotiations drag on and an agreement isn’t agreed upon before your loan period expires, there’s a chance you may have to repay what you owe in full.
There’s No Guarantee Your Creditors Will Agree to Terms
Not all creditors will be willing to write off a portion of your debt, especially if they believe they can get you to pay in full via other means. Therefore, when you utilize a debt settlement company’s services, there’s no guarantee your creditors will agree to such a settlement deal.
Things to Consider When Comparing Debt Settlement Programs
If you decide that a debt settlement program is a suitable course of action for you, the next step is to find a good debt settlement company suited to your individual needs and circumstances.
Here are some of the key points to look for when comparing debt settlement companies and programs…
What Are the Fees?
First and foremost, you should check a company’s fees and calculate whether they are affordable. Most debt settlement companies charge their fees as a percentage of the settled debt amount – usually anywhere from 10 to up to around 30 percent.
As you’re going down this route to save money and improve your financial situation, it makes sense to avoid paying unnecessarily high fees.
What is The Company’s Track Record
There is a gulf in class between various debt settlement companies, so it’s essential to do your research to get an idea of each company’s track record and success rate. Simple reading online reviews is an excellent place to start.
What Are The Minimum Debt Requirements
Each company usually has a minimum debt requirement (typically around $10,000), which you must meet for them to consider negotiating a deal on your behalf.
Most debt settlement companies won’t consider taking you as a client if you don’t meet their minimum requirement. So, it’s very important you check a firm’s minimum debt requirement as soon as possible so you don’t waste time researching them and booking a consultation only to find out they can’t represent you.
Could You Do This On Your Own?
In most cases, it’s advisable to utilize a dedicated debt settlement company, as they have far more expertise and experience in this field than even the most financially literate Boomers.
Using a company often means you get a much better deal, which is likely to leave you in a better financial position even once their fees are taken into account. As mentioned earlier, it’s of utmost that you pick a suitable and trusted company; otherwise, there’s not much point in using a dedicated debt settlement firm.
Is Debt Settlement Right For Me?
If you’re in over your head with debt and have serious concerns about your ability to pay it off, then debt settlement may be suitable for you. It can also be equally suitable for Boomers who manage their debt reasonably well but want to settle it on more favorable terms.
However, if you’re particularly keen on not hurting your credit score, debt settlement is likely to be a bad idea for you. Since it sometimes involves deliberately missing payments to gain leverage over your creditors. But, if you’re already behind on payments, this is less of an issue, though it can still further worsen your credit score.
Keep in mind that there are alternatives to debt settlement programs.
What Are the Alternatives to Debt Settlement?
There are a few common alternatives to debt settlement – some of which don’t adversely impact your credit score.
Debt management essentially consists of you being more strategic in how you pay off your debt – typically after seeking professional financial advice. This can allow you to pay off your debt more quickly and save money by prioritizing your high-interest loans.
However, this option doesn’t involve any of your debt getting written off, so you’ll have to pay what you owe in full. Which means your credit score won’t be directly affected.
Declaring bankruptcy can sometimes be a suitable way to go debt-free, and it’s usually a much quicker process than debt settlement.
However, you may lose some of your assets. Your credit score will be damaged for around a decade, making it very difficult or impossible in some cases to borrow money or purchase items on credit.
Last but not least, there is debt consolidation. Debt consolidation involves you simplifying your debt to make your finances less complicated and, therefore, easier to manage. You should also aim to repay high-interest loans first to minimize your overall repayment charges.
This method doesn’t help you write off some of your debt, nor does it necessarily help you become debt-free more quickly. However, it can help you lower the cost of servicing and paying off your debt without your credit score taking a hit, so it might just be the right course of action for some Baby Boomers.