What is Debt Settlement?

Debt settlement is, simply put, hiring a debt settlement company to help negotiate lower payoffs on personal loans, collections, and open accounts like credit cards. Sometimes these companies misleadingly advertise their services as a way to consolidate debt — or “debt consolidation,” — but make no bones about it, this is not a debt consolidation loan. Their main objective is to negotiate a settlement with all of your creditors and lenders.

How Debt Settlement Companies Work

When you hire a debt settlement company you are hiring them to negotiate with your lenders on your behalf. Their job is to negotiate a new, much lower amount for you to pay on the account. In turn, you pay the debt settlement company a monthly payment and they pay your creditors, minus their commission or fee which they deduct from your payment.

When you hire a debt settlement company the first thing they will tell you is to stop communicating with your lenders or collectors. Their objective here is to get your lenders so desperate for some sort of payment that they’ll be more open to accepting a settlement deal. A settlement means that the lender, collection agency, or credit card company agrees to take a significantly lower payoff amount than what you actually owe, wiping your slate clear from the financial obligation.

Pros of Debt Settlement

There’s one obvious pro to debt settlement: a much lower, single monthly payment that you can afford. And, if a settlement is negotiated and accepted, you will pay much much less than you initially owed on the account. Many times this amount is less than 50% of the original debt, which can end up saving you quite a lot of money in the long run.

Cons of Debt Settlement

Now for the cons, there are quite a few so stay with me. Debt settlement should only be used by those that already have very poor credit. If not, your credit standing and your credit score will be severely damaged for quite a while.

What the debt settlement companies fail to tell you is that when you settle a debt, the lender, collector, or credit card company will report the debt as “settled for less than agreed” or “settlement accepted,” damaging your credit report for seven years. Plus, even though you’re ignoring your lenders (as directed by the settlement company), they will continue to report late payment status updates to the credit bureaus, which will continually get worse until the account is charged off or goes to collection — or is settled, which is the settlement firms main goal.

Another drawback is that while you’re paying the settlement company, most won’t tell you exactly how much of your monthly payment is going towards your debts and how much is actually being deducted as their “fee.”

Avoid Getting Scammed

It goes without saying that you do NOT want to get scammed by a debt settlement company. Some ways to do your own due diligence when it comes to dealing with debt settlement companies include:

– Ask lots of questions, like how long the company has been in business, what type of training its employees have. You want to go with a company that’s been around and has a staff who understand personal finance.

– Avoid companies that contact you rather than the other way around.

– Read — and understand — the fine print before you sign anything.

– Most companies offer free consultations before you sign anything. Use the opportunity to ask lots of questions and avoid any company that isn’t interested in answering them.

– Settlement companies with a proven track record of getting clients out of debt will have a long line of people willing to testify to that effect. Check the Better Business Bureau to see what people are saying about the company you’re looking into.

The Alternative: Debt Management Program

Debt settlement isn’t the only option for people who are swimming in debt. If you’ve tried debt management on your own and are still struggling and need help, you may want to consider a Debt Management Program (DMP). DMPs are often run on a non-profit basis through a consumer credit counseling service, and have no motivation other than wanting to see ordinary people get out of debt. The fees are minimal, and much lower than you’ll pay a settlement or consolidation company — and you’ll pay off your debts, typically in less than five years, without all the damage to your credit and credit scores.

Another great thing about legitimate credit counseling services that offer DMPs is that they can also help you evaluate your debt situation, and if you’re not a good candidate for a DMP, they can help you determine if bankruptcy is an option — always a last resort, but there are cases where it’s the only option left.

Before you decide on a credit counseling service, make sure they are legit. You can do this by verifying that they are a member of the National Foundation for Credit Counseling by visiting their website or by calling 1.800.251.CCCS.

Best Ways to Get Out of Debt

Using a HELOC

A HELOC, or a home equity line of credit, is a revolving line of credit secured by equity in your home. That line of credit can be tapped and used for whatever you like; to pay off debt, to buy a car, to pay college tuition, or just to have as an emergency fund. HELOCs are commonly used to pay off credit card debt because the interest is tax deductible and the interest rates are relatively low.

The danger when using a HELOC is what happens if you go into default. Because a HELOC is secured by the equity in your home the bank can foreclose on your house if you don’t pay back the loan. For some people that’s far too much of a gamble just to pay off a little credit card debt.

Using a Balance Transfer

If you’ve got good credit then you’re probably already getting offers for zero percent credit cards. These are tempting, and for good reason. Converting your expensive credit card debt to zero interest credit card debt is a considerable trade off in your favor.

Many of these credit cards allow you to transfer your entire interest accruing balances from other cards AND allow you to make new purchases, all at zero percent interest for some period of time. If you’re disciplined you can use the grace period, normally between 6-12 months, to aggressively attack the balance and get out of the debt.

Using a Personal Loan

A personal loan is an unsecured installment loan. If you’ve got good credit it’s not that hard to qualify for personal loans well above $10,000. If you use the funds from a personal loan to pay off credit card debt then your credit scores should shoot through the roof because you’ll be converting score damaging revolving debt into score benign installment debt.

As far as the cost of the installment loan, it’s possible the interest rate will be considerably lower. If you have good credit you can get an installment loan in the low teens, while your credit card debt might be as expensive as the high 20s. Plus installment loans have a much shorter payoff period compared to credit cards.

The post Getting Out of Debt: The Pros & Cons of Debt Settlement appeared first on Credit Sesame.

Fortunately, our consumer credit system functions reasonably well. You’ll meet more people who have never had an issue than those who have. Disputing a credit card charge isn’t rocket science, but if you’ve never done it before you might not know where to begin. We hope you never have to use this guide, but in the event you do – we’ve got you covered.

Reasons You Can Dispute A Charge

The Fair Credit Billing Act (FCBA) identifies seven things that count as “billing errors.”

• Mathematical errors.
• Unauthorized charges over $50. While not covered by the law, most credit card companies will refund unauthorized charges less than $50 as a courtesy.
• Charges related to your statement being mailed to the wrong address after you have put in a change of address form with the company.
• Charges for things you did not accept on delivery or were not delivered as promised.
• Charges without the correct date or price.
• Charges where you did not receive a proper refund even though a refund was agreed upon.
• Any charge where you demand an explanation or proof of purchase, as well as believe there is an error or need the charge clarified.

No part of the act refers to charges related to shoddy or defective merchandise. This article refers only to provisions outlined in the FCBA. If you are disputing a charge related to the quality of goods, contact your local consumer protection agency or attorney general to see what legal remedies are at your disposal. You may also contact your credit card issuer directly as many cover extended warranties or defective merchandise coverage as part of your card member benefits.

Do Some Detective Work

Before you start disputing a charge, do your due diligence. It’s not uncommon for charges to appear on your credit card that you don’t recognize. This is because some merchants appear on your statement under names that aren’t familiar to you. Think about what charges you made on the given day that are about the same as things you purchased. Investigate to see if the name being used on the charge is different than the business name you are familiar with, but the correct business nonetheless. Only when you have determined that the business in question is not one that you patronize should you proceed to other steps.

Contact the Merchant

There are a few reasons for contacting the merchant before you contact the credit card company. You might just be wrong. For example, a charge might appear different at a restaurant than what you remember because you failed to include gratuity in your own calculations. If the charge is incorrect (such as being charged twice for the same transaction) the merchant will often be happy to work with you in getting the issue resolved. If the charge is completely fraudulent, the merchant can help you and your credit card company investigate how the charge got there.

Contact the Credit Card Company

If the merchant fails to resolve the situation, it’s time to contact your credit card company. You’ll need all the details of the transaction: date, time, store, location and a receipt if you can find one. Some credit card companies might require you to fill out a police report in the case of a fraudulent charge, which is always a good idea even when it’s not required. Your credit card company will probably also require you to fill out forms describing why you are disputing the charge but each issuer may vary.

Resolution

Eventually, you’ll come to some resolution with your credit card company. They’ll either refund the charge or they won’t. They’ll notify you of this via postal mail or email. The complaint must be resolved within two billing cycles, which can be as long as 90 days.

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The Financial Pros of Getting Married

In addition to commitment and a beautiful ceremony, marriage carries economic incentives as well. Major benefits of marriage include:

• Joint health insurance: If one of you has a great health insurance policy through an employer and the other doesn’t, getting married might be the easiest way to ensure both of you are covered. Not all employers allow adding a domestic partner to your health insurance policy.
• A bigger home: Assuming both you and your future spouse are employed, applying for a mortgage together will increase your chance of getting approved for a larger amount (and, consequently, enable you to buy a bigger home). Of course, bigger won’t necessarily be better if you overextend yourselves. The same applies to renting a home: your landlord will take both incomes into consideration, but make sure you’re not spending more than you can afford.
• Death benefits: The IRS generally does not tax spousal inheritance, except in the case of the very wealthy. Further, you might receive benefits such as Social Security and pension, which are generally not available to unmarried couples.

The Financial Cons of Getting Married

Some potentially serious financial problems arise when you walk down the aisle. Considering the ramifications before you get married is essential for planning the best financial future for you and your spouse.

• Money management: If partner has trouble managing money wisely, trouble can ensue for both.
• The marriage penalty:  Simply put, because one spouse’s income will be tacked on top of the other for tax purposes, their whole income will fall within higher tax brackets compared with each of you filing single. However, higher deduction limits largely offset the marriage penalty, so it shouldn’t be a major concern. If in doubt, you can always discuss the details with an accountant or run joint vs single filing scenarios through your tax preparation software.
• Liability: Financial judgments on joint accounts affect both spouses. If your partner goes bankrupt or doesn’t pay bills on joint accounts, you can be held financially liable.

The Financial Pros of Staying Single

Other than being able to go out every night without answering to anyone, staying single has financial benefits, just like getting married.

• Control: While married couples don’t have to merge their finances, many do – and then regret it, should the marriage turn into a divorce statistic. Single individuals, or even couples who live together without being married, generally have and retain full control of their financial and credit lives.
• Career focus: When you get married, the marriage becomes the primary focus of your life – especially once children come into the picture. Staying single, even when you’re dating seriously or cohabitating, allows you a little more leeway to concentrate on your professional life.

The Financial Cons of Staying Single

The final thing to consider when thinking about the financial side of getting married are the financial problems related to staying on your own.

• Retirement planning: Forbes.com reports that single individuals generally put off retirement planning into their 40s. Married couples tend to start saving earlier, making retirement easier and potentially more lucrative.
• Higher per-person cost of living: To state the obvious, single individuals (who live alone) pay a higher percentage of their income for basic necessities, including food, phones and cable television.
• The marriage penalty: The marriage penalty cuts both ways. Single filers pay, on average, 35% of their income to the IRS, as opposed to just 29% for married couples. (Keep in mind, those averages include couples where only one spouse works, which may explain the lower average tax rate.)

Making Married Life Financially Sound

All told, though, have you ever heard of anyone who decided to not get married because it’s financially imprudent? Hardly.

When it comes to love and finances, it’s less about knowing the cons of being married and more about finding the best way to handle your finances as a married couple. Some ways to ensure a sound financial and romantic union include:

• Put all your financial information — good and bad — on the table. This allows for a frank, in-depth discussion of the issues raised above.
• Create a budget together. This allows you and your future spouse to compare income with expenditures and plan for your financial future.
• Create a plan to pay off outstanding bills and get out of debt.

It might be the last thing on your mind when you’re planning your wedding, but trust us: at the end of the day, examining the financial consequences of marriage are more important than finding the perfect color linens for your wedding reception.

Image: Andrew Morrell, Flickr

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