How Does A Debt Settlement Program Work?
Debt settlement programs have existed in Canada and Nova Scotia for a very long time. Their goal is to help save money on interest, fees, and principal balance. Of course, every situation is different, but there the basic process remains the same for everyone who signs up for a debt settlement program.
This article is a series about Debt Settlement. We recommend you start from the beginning. The other articles are linked below:
Part 2 – How Do Debt Settlement Programs Work? – You’re reading this now
Debt Consultation & Settlement
Your first step is to speak to a debt professional to know if a debt settlement program is right for you.
Oftentimes, due to the pros of a debt settlement program, consumers think it is the best option for them. However, after looking at the specific situation, another option is better suited in many cases. These options include debt consolidation, credit counselling, consumer proposal, or even bankruptcy.
Most debt settlement firms only work with larger amounts of debts, generally more than $10,000. When debts are lower than this, other debt options may be more suitable. Such as an extensive budgeting plan, credit counselling, or even a consolidation loan.
The Debt Settlement Negotiation
If, after speaking with a debt professional, debt settlement is the right choice for you then you will typically engage the services of a debt settlement firm. The goal of the firm will be to reduce the amount of principal amounting owing to creditors and not just simply reduce interest rates. The firm will typically outline an estimation of debt reduction. Once they have given you this number you will typically be required to save this amount of money (and potentially slightly more) for the firm to then work with, and negotiate on your behalf.
The amount that the debt settlement firm can reduce your debt depends on a variety of factors. While most consumers have a very hard time negotiating settlements themselves, a professional, reputable firm can reduce debt anywhere from 20 to 80 percent depending on the circumstances.
Except in the rarest of circumstances, only unsecured debts such as personal loans, lines of credit, and credit cards can be reduced in debt settlement programs. Secured debt like car loans and mortgages typically cannot be reduced.
The Payment Process
Because you are typically required to save up a lump-sum of money before a debt settlement firm will begin working with you the payment process is quite simple. Once the money is saved it will be sent to a Trust account, typically administered by a law firm for safety, who will only release funds according to strict instructions you agree to.
In most cases, creditors are worked on as a group but due to varying factors may not be settled at the same time.
After the Last Creditor Is Paid Off
Once your final creditor is paid off you will typically receive a final report that outlines original debt loads, settled amount, amount saved, fees charged etc. You should also receive confirmation letters of settlement. These will be your back-up in the instances a creditor or collection agency attempts to pursue you for the settled debts in the future.
If all of the funds in the Trust account have not been used they will also be returned to you.
How Does Debt Settlement Affect My Credit?
The overwhelming majority of people who are struggling with large debt loads believe the only way out is Bankruptcy. While this is potentially the right option in some situations the majority of people are able to avoid bankruptcy entirely if they desire.
There is no debt restructuring option, including debt settlement, that is free from a credit impact. Depending on which option you choose the actual time frame your credit is impacted is what changes.
Debt Settlement actually has one of the lowest impacts on credit, when done properly. The reason for this is because typically speaking your accounts will be marked as either Paid or Settled and then closed. Assuming you have entirely cleaned up your credit report this will allow you to begin rebuilding credit immediately, with no issues. It is important to note that if done incorrectly debt settlement can have extremely negative impacts on your credit. This is why it is important to consult a professional.
Find Out More
If you are struggling with debt and are considering a debt settlement program you should definitely consult one of our Debt Relief Specialists to determine which debt relief option is best suited for your situation.
Debt settlement is only one option to deal with debt. We are one of Canada’s largest independent debt restructuring firms and have helped restructure billions in consumer debt since 2002.
This article was written by David Moffatt. A Senior Debt Relief Specialist with 4 Pillars Halifax. 4 Pillars has assisted in creating plans that have helped save Canadians over $1 Billion dollars of consumer and tax debt since 2002. We believe that no consumer should have to struggle with the stress of overwhelming debt. Our debt restructuring strategies can help you cut your debt by up to 80% with less than 3% of our clients ever getting into deep financial difficulties again.
We are proud members of the Canadian Debtors Association. We work for you, not your creditors.
If you are struggling with debt please reach out. It hurts to continue to suffer financially. 4 Pillars Halifax services Halifax, Dartmouth, Bedford, Sackville and the entirety of HRM.