Avoid High Service Fees of Debt Consolidation Companies

by admin on December 11, 2014

Typically when a borrower defaults on loan repayments, lenders wish to forgo a certain percentage of the loan rather than forfeiting all the cash owed in case the borrower becomes insolvent. Debt settlement refers to the procedure of conciliation between the debtor and creditor to diminish the sum of debt owed.  Debt settlement is thought to be an answer to installments that have been due for a long time and a substitute to insolvency.

iStock_000008642715XSmallUsually, the debt settlement procedure comprises of discussions between the organizations that specialize in debt settlement on part of the borrower and the lender to lessen the total loan to a smaller quantity. Mostly, the lender and borrower decide on a certain percentage of the overall unpaid loan to be forfeited by the lender. But, debt settlement cannot be carried out for all kinds of loans. Uncollateralized loans that are not pledged by real assets like vehicle or a house may not be forfeited.

Although debt settlement appears to be the best lawful answer available to past due installments, it is not free from drawbacks. Once a loan is forfeited, the borrower may not be able to obtain unsecured loan like credit card loan or medical treatment installments for a long time. Moreover, even if the debt settlement negotiations are successful, credit reports usually show some evidence of debt settlement hence lowering credit rating of the debtor. Nevertheless, if the creditor agrees during the negotiations to provide a ‘paid in full’, settlement may have no significant effect on the credit rating. Mostly, debt settlement is carried out by institutions that specialize in debt settlement or legal advisors who help lenders in negotiating debt settlement. However, in return for their services, these debt settlement companies usually charge big service fees in the form of a percentage of the total debt owed, or a percentage of the debt amount forgiven along with initial sign-up fee and monthly service charges.

As the debt settlement institutions demand cash to be paid periodically and place it in an account till the time the lender can be paid, therefore, debt settlement may carry on for a long time. Meanwhile, the interest and late fee may keep on accruing and the bills may keep on increasing. Moreover, the creditors may also sue the debtor in an attempt to recover debt and interest or may send the case to the collections agency sooner than required.

Due to the high service fee of debt settlement companies and the extended settlement period, the withdrawal charge of debt settlement companies is fairly high. After a few years of making payments to the settlement companies, clients may still be in the same position as before since most of the amount saved goes to the settlement companies as service fee.

Resources:

Life on Credit

About Service Fees

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