Credit Blogs

Debt settlement is a method of debt reduction, known as credit settlement and debt negotiation. With this type of agreement, the lender and borrower negotiate to reduce the outstanding balance to be paid off in full. The overall debt is reduced but the debtor is required to make a lump sum payment. Negotiations are deemed successful if the lender forgives a portion of the total balance.

Not all debts can be settled. Debt settlement is possible for unsecured debt such as credit card debt. Other types of debt such as mortgages and auto financing are not settled through this debt reduction strategy.

Debt settlement comes with obvious advantages for debtors. They don’t have to go through court-managed procedures such as bankruptcy. The outstanding balance is considerably reduced – in some cases by over 50 percent. The creditor also benefits because debt settlement is an additional guarantee that the borrower intends to pay off his obligations. With bankruptcy, on the other hand, the creditor can lose the money borrowed.

Debt settlement is often used for reducing credit card debt. There are two ways to go about it, on your own or with the help of a debt settlement company. Companies that specialize in settling credit card debt should be approached with caution. While there are many trustworthy players on the market, some of them collect the debtor’s payments before they make a settlement offer. Some of them don’t make an offer at all while the debtor still receives collection calls and his credit rating is affected even more.

Before settling credit card debt, the debtor has to decide on the amount he can pay. Depending on the debt and the creditor, settlement is normally done for up to sixty percent of the outstanding balance. Payment is also done in two ways, either as a lump sum or in the form of multiple payments. Most lenders will go for a couple of payments or a lump sum payment rather than payment over several months. Experts advise to offer less than what you can pay. In this way, you have some room to negotiate if the creditor is willing to accept your terms.

Keep in mind that your credit card account may be closed after the debt settlement procedure takes place. The credit limit may be eliminated or reduced now that the creditor knows that the balance will not be paid in full.

Declaring bankruptcy is associated with repaying debts with court protection or wiping them altogether. This appeals to many desperate borrowers. No more worries or constant calls from creditors, and one can move on debt-free when debt has been so overwhelming.

This decision is not an easy one, however, or it shouldn’t be. Declaring bankruptcy will tarnish your credit score and make it very difficult to apply for a mortgage, loan, credit card, or any other type of financing. Filing for bankruptcy tells potential creditors that you can’t manage debt and your finances in general.

So, when should you file for bankruptcy? Most financial advisors consider it a last resort step, when budgeting, debt consolidation, credit counseling, and other efforts to eliminate debt do not bring results. Credit counseling programs come with a strict debt management plan to follow. Debt consolidation entails applying for a single loan as to pay off multiple debts. Another option is to file a consumer proposal with your lending institutions. Even if you exhausted all options, it is wise to seek the advice of a bankruptcy attorney or another professional in the field.

If you are decided on declaring bankruptcy, it is not a difficult process. You should contact a federally licensed trustee who is in the position to evaluate your financial circumstances. As a next step, you will assign any assets you own to the trustee. The latter will distribute your assets to the lenders. He or she also prepares the necessary documentation with the Office of Superintendent of Bankruptcy. That done, the creditors are stopped from proceeding with legal actions against you. Any surplus income you make will go to your creditors, and you will be required to attend counseling with the trustee. Then, you will be discharged. A discharge means that you are no longer required to pay off the discharged debt.

Filing for bankruptcy means that your financial situation and credit score are so bad that hardly anything you do will make them any worse. If that is the case, bankruptcy can help you start anew. The procedure is not expensive and doesn’t take long to complete. Rebuilding your credit will be a long process, though, staying on your file for as long as 10 years. So, you may want to discuss that with your trustee.

If you plan to apply for a mortgage loan or make a large purchase, your credit score will turn into a major advantage or hold you back. The difference between an excellent credit score and a not so good one is determined by the financial decisions you have made so far. A number of factors have impact on how strong one’s credit score is.

One factor is how often you apply with different creditors. Having multiple credit cards may hurt your credit score. Creditors are more than willing to extend loans to creditworthy and trustworthy borrowers. However, if you have been applying for a number of small personal loans or credit cards, this means you are not handling your finances very well. Even if your applications have been approved, your credit score may take a hit.

If you have old credit cards in your wallet, they are still on your credit report. Think of all open accounts you have, even those you don’t use at present. If you have too many of them, they can affect your credit score. Close them down to boost your score.

Make sure your credit report does not contain errors. Double check all details with the reporting bureaus. They may not have your employment or home information right. Keep in mind that with so much information on their hands, the credit bureaus sometimes make mistakes. These can lower your credit score so you may consider disputing any errors you find. In addition, how much money you make from work and other sources of income is factored in when determining your score. Check with the reporting bureaus, making sure they have the correct information on file.

Naturally, paying your monthly bills on time is a must. Every time you miss paying your bills, your credit score suffers.

Having a lot of revolving debt and insufficient income to pay it off is another factor that can kill your credit score. Missing payments on a regular basis is another thing you should avoid. In these circumstances, the lenders will be especially unwilling to extend you any form of financing.

Obviously, some financial decisions affect your credit score more than others. Foreclosures, bankruptcy, and collection may take years to recover from. These can happen to everyone, even to successful people. It is important to monitor your credit score until your financial difficulties are over.