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Familiarize yourself with debt settlement before you dive in

Understand your debt options
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There are many people who look to debt settlement companies to help solve their debt crisis. The majority of companies will work with people who have at least $10,000 in debt. There are a select few companies that will accept smaller debt totals into the program. In order to find the most relief, there needs to be room to maneuver in negotiations. Are you familiar with how a debt settlement company works?

For starters, settlement programs work with lenders that have a negotiations history. They can't guarantee success, but they can promise to do their best. There are specific types of debt that debt settlement companies will not work with.

Military accounts - Credit cards or banks affiliated with branches of the military are not accepted into the program.

Military personnel - If the applicant is in the military but wants to put non-military accounts into the program, the applicant will have to have a superior officer write a letter. This letter must give permission for this debt to go into a settlement program. Debt is not looked at positively in the military. It can affect your position and security clearance. If you are in the military, it is important that you are upfront with your superior officers. You may be asked to get help by military sponsored credit counseling services instead.

Credit Unions - Most credit unions will have their own debt counseling services for its members. They don’t like to negotiate money owed to them. They work for their members and want to keep their member’s debt in-house.

Payday loans - There are some direct lenders that will work to settle loans. In general, the small debt is rarely taken under a debt settlement process. Negotiations rarely bring much saving out of a few hundred dollar loan.

Collateral loans - There are no negotiations with collateral. You will have to forfeit the property. You are better off attempting to work out a payment plan with the lender yourself for the sake of keeping your property.

Once you enter the program, the settlement company will request that you stop making payments towards all debt on the list. They cannot force you to stop, but if you want negotiations to work, the lender will have to see that they won’t get money any other way. Debt settlement will allow the lender to collect more of their money back than if they sold it to a debt collector. Most large creditors and banks negotiate with these companies.

There are pitfalls to debt settlement programs. For one, your credit score will fall fast. No payments and settled accounts scar your history for seven years. If you have left other debt out of the program on-time payments to them will help, but it will take a while.

Debt settlement is not free. The more accounts entered into the program, the more money the settlement company will make. It is against the law for any debt settlement company to collect fees up front. You will have to make payments into an escrow account in your name. When there is enough money to negotiate one debt, the company will do so and then collect their fees for that particular transaction. Their fee will be a percentage of the amount settled. You continue to make your monthly payments into the escrow account until each debt is settled. The faster you get money into escrow, the sooner negotiations can start.

Not every debt settlement company follows best practices. Just like any other type of alternative money strategy, you will want to shop around for the best option. Make an extensive list of questions about the process and call several companies. You should never have to give your Social Security number in order to get answers. Compare results and work with a company you are comfortable with. You will learn a lot just by talking with them on the phone.

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