In 2020, the average amount of credit card debt for Americans was around $5,300. The average amount of personal loan debt for consumers was nearly $16,500. The average amount of student loan debt exceeded $38,000. These numbers represent just the average, so many borrowers actually find themselves facing even steeper debts than those figures alone convey.
At a certain point, it may start to feel like the chances of paying down your debts without drastic measures are slim to none. This is a time when many borrowers start exploring intensive options, or maybe even worrying they’ll have little choice but to file for bankruptcy. Settlement is one such strategy to explore when your debt situation is dire.
Here are some tips for avoiding the risks of debt settlement so you’ll know what to expect and know how to get the most from the process, if you do go that route.
Know What Debt Is Eligible for Settlement
If you’re mostly having trouble with your mortgage or auto loan, debt settlement cannot help. Why? Because those debts are already secured by an asset — your home and your vehicle, respectively. Rather, debt settlement is designed to address unsecured debts, like credit cards, medical debts and personal loans. There’s no asset for lenders to repossess in these cases, but your credit score can suffer and the amount of interest you owe tends to keep growing over time.
Not only does debt need to be unsecured, but you also must have enough to be eligible for settlement. The minimum amount needed varies between programs, but it’s not uncommon to need $7,500 or more to enroll.
And what about student debt? It depends on the type. Here’s an example: While certain private student loans qualify for the best student debt settlement at Freedom Debt Relief, federal student loans do not.
Making a list of the amounts and types of the balances you’re trying to address will help you better understand whether you may be a candidate for settlement or whether you need to explore alternatives.
Weigh the Potential Consequences of Debt Settlement
When successful, debt settlement can help borrowers resolve their debts for a percentage of the full balance. However, there are potential trade-offs for negotiating with creditors in this way.
You may have to decide to withhold payments to creditors as you save up enough money to negotiate — which runs the risk of damaging your credit score and perhaps even triggering a lawsuit. Furthermore, those pesky communications from creditors or collection agencies may continue as long as you have outstanding balances.
Avoid Debt Settlement Scams
Another unfortunate risk of debt settlement is the existence of scammers hoping to make a quick buck off of borrowers.
What’s the difference between a legitimate program and a scam? Companies that do things by
the book will never ask for a fee up-front before they’ve resolved a single debt because to do so is actually illegal. Scammers, on the other hand, may try to collect fees at the front-end of the process.
Reputable companies will also never make sweeping guarantees about the results they can get. They will be clear about the possible outcomes, both positive and negative. Scammers may try to make their offers sound enticing by guaranteeing it can eliminate your debt by a certain amount or within a certain timeframe. In reality, there are too many unknowns to make a promise like that.
Choosing your debt relief partner wisely will help you avoid some of these risks, as will doing your research before signing up. The more you know about the settlement process, the more empowered you will be to make the right choices for your situation.