People inundated in unpaid bills and surmounting debts are often tempted to opt for debt relief options. Debt relief is an umbrella term for a lot of different processes that help them manage their debt and pay them off little by little. The true debt relief program is supposed to protect the FICO scores or improve them over time, without creating a financial pressure on the clients and their family. However, a lot of people simply opt for debt settlement programs instead. These are far from the ideal “relief” you would expect after spending time and money in the enrolment process.
The typical cost of debt settlement for the typical client
If you have heard the debt settlement can cost you a few too many pretty bucks, you may not be wrong. Most people approach these debt settlement companies after paying 70% to 75% of their debts, and the cost of negotiating the unpaid 30% to 25% debt often becomes 100% of the debt. The cost of the settlement varies from situation to situation, like most debt relief services.
Know your creditor(s)
The professional and financial profile of your creditor will make a huge difference in the upfront fees and the settlement cost. The average amount of settlement can be much steeper when you have to deal with corporate banks and financial institutions. Aggressive creditors often demand more regarding the settlement. Some amicable creditors may need lesser settlement amounts that can vary between 10% and 20% of the total debt. However, the non-profit debt settlement companies and debt counseling agencies are not allowed to charge upfront fees for consultations. You can always approach them for a comprehensive look at your debt profile and the probable charges of settlement your current debts might be attracting shortly.
Your payment profile
The settlement amount and percentage will directly depend upon your payment history. If you have always paid your dues and never missed a payment, it may be easier for you to find amicable rates. Missing the first installment is a prominent factor that determines your very first settlement rate, irrespective of the debt percentage you have already paid. Also, you should never try to estimate the costs by yourself. Asking non-profit debt settlement companies often results in at least 10% lesser costs.
How much can a debt settlement cost you?
Suppose you have some other unpaid debts and you are already significantly behind in all payments, then the company may be unable to get you a low amount for settlement. You may end up paying 100% of what you owe in principle and interest, and a percentage of the same to the settlement company. Since a history of unpaid loans can lead to displeased creditors, who would want to exact all pending amounts. You need reliable and experienced companies to guide you to the best rates of settlement, without charging upfront fees.
When your credit record is deplorable, and you have a mountain of unpaid debt, depending on the factors we have mentioned above, your rates can be similar to this –
- Flat rental re-letting fees will be 40%
- Finding accounts will be 65%
- Debts under $750 will cost around 80% of the total payable
- Set debts under $750 can cost around 85%
Therefore, it is quite apparent that you may end up paying between 10% and 40% depending on what you owe to the creditors and who your creditors are. For example – if you owe around $10,000, you can end up paying over $2000 or more in debt settlement fee.
The true cost of debt settlement
The real cost of debt settlement is not in the fee. Credit scores and financial profiles suffer a lot more than financial status when it comes to debt settlements. For people with scores between 600 and 650, a couple of months into debt settlement can cost them more than 50-odd points. We have seen credit scores plummet between 550 and 580 from the 600s range within the first six months. This usually happens due to halting all installments and payments for the time being and diverting all funds to savings accounts. Even after the settlement company starts paying these creditors in newly settled monthly payments, it may take close to a year for the FICO scores to revive themselves.
A few final words
DIY debt settlement is quite popular among a lot of borrowers. This may seem like the less costly option, but it can cost you regarding your payment profile. You may end up with the wrong companies that can exacerbate the already persistent risks of settling debts with corporate money lenders. In truth, just like bankruptcy or debt consolidation, debt settlement is not for everyone. You should only consider it when there are no other viable options, and the outcomes far outweigh the risks you might be taking.