Debt Consolidation by doing a Debt Settlement

Being in debt can be suffocating and it is understandable why people seek to do debt settlement. Debt settlement, also called credit settlement or debt negotiation, is a debt consolidation method whereby you agree with your creditors that they accept a reduced payment as full settlement for the debt you owe them.

From October 2010, for-profit debt settlement companies started advertising to Canadians a new method of settling credit card debt. Canadians could stop paying creditors, save up the money, and then hire “expert negotiators” to negotiate with creditors. This is also a common practice in the U.S. However, this method does not really work. This is because:

  • When you quit making your monthly payments, collection agencies start knocking on your doors.
  • There is a risk of being taken to court by the creditors who seek the garnishing of your wages or putting a lien on your house.
  • Your credit rating deteriorates when you are not making the payments.
  • Debt settlement companies usually charge a large upfront fee which is cut from payments of the first few months. They do this because of the work they have done convincing your creditors to take the lump sum amount. If the settlement plan fails, you have a higher debt to pay your creditors and you will have spent a substantial amount of money in fees.
  • Many banks and other lenders see this is a scam and do not deal with these debt settlement companies.
  • The debt settlement industry is so confusing that Alberta, Nova Scotia, and Manitoba has introduced new regulations to govern the industry. The Ontario government will soon be introducing similar regulations. These regulations focus on banning up-front fees, limiting the amount of fees applicable, requiring contracts that are clearly worded so you know the exact service you are paying for, and allowing a 10-day cooling off period for you to rethink your decision so you don’t feel pressurized to sign.

Before October 2010, Canadians could only do debt settlement in one way. They could get most of the money, contract creditors, and then offer to pay off full or part of the balance in a lump sum payment. If creditors agreed, you got to pay as low as 50% to 80% of the debt.

You should stick to non-profit credit counseling organizations because they are usually very successful negotiation debt settlements. These organizations do not agree to do debt settlements unless this is the only debt consolidation option left.

  • You will repay less than what you owe, sometimes considerably less (up to 20%).
  • Two years after you have paid off the debt, your credit rating will be completely repaired, but you must have worked with a non-profit debt settlement organization.
  • You will have peace of mind since creditors will not be knocking on your door. You will not be dealing with your creditors directly.
  • You will avoid filing for bankruptcy, which destroys your credit for many, many years (and is a matter of public record).
  • You will need to have a lump sum of money available, which is often difficult if you are already having financial problems unless you have a rich uncle somewhere.
  • For-profit debt settlement services have less than 10% success rate and you will not get the services you have paid for in hefty fees. In most cases, the fees applicable are as high as the amount you save.
  • It might take between 6 and 7 years for your credit rating to recover if you are working with a for-profit debt settlement company.
  • Creditors can refuse to cooperate, taking you back to the drawing board for another debt consolidation option.

Applicable Interest Rates

Once creditors agree to the debt settlement, you will not be charged any fees or interest if you are able to pay up by the settlement expiry date. The debt will then be considered legally paid off in full. However, ensure that this is captured in writing when negotiating with creditors so they don’t turn on you for the rest of the money.

Debt settlement can be as low as 20% of the full amount to over 80%, depending on your particular situation. As an example, if you have lost your job and you are now working on a lower-paying part-time job, creditors will see you are unable to pay the full amount and since they don’t want you to file for bankruptcy (which means they will not be paid anything), they can accept a lower debt settlement.