Description
If you know you will be unable to pay off a debt and wish to pursue a settlement, you may need to stop making payments. While this may sound counterintuitive, settlements are generally facilitated through lump-sum payouts. By stopping regular payments, you can put financial resources toward a lump-sum payment that may allow you to settle the debt for less than what you owe. In other cases, a settlement will involve a heavily adjusted payment plan with smaller monthly installments. Either way, a creditor must be convinced there is no means of extracting the full amount owed.
Debt settlement is not an option for all types of debt. Unsecured debts, including credit card debt and medical debt, can often be settled. You will not be able to settle debt involving a mortgage, vehicle loan, or any other type of property that can be foreclosed or repossessed. Tax debt can sometimes be settled directly with the Internal Revenue Service (IRS). Student loan debt cannot be settled, but you may be able to negotiate a modified payment plan.
Debt settlement is not the same thing as debt consolidation. In debt consolidation, you take out a new loan for the entire amount owed, including penalties, and pay the new loan amount over many years with considerable interest. Some will choose to consolidate mortgages and end up paying more than three times what they originally owed.
Debt settlement is almost always more advantageous than debt consolidation. In a debt settlement, you will pay off the reduced amount over 24 to 36 months with no additional interest.
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