If you’re in deep debt, shouldn’t “severance loans” help? Not necessarily, experts say
Dubai: It is often seen as a last resort for a heavily indebted person to settle their debt by negotiating with the creditor and agreeing to accept less than the amount owed in full.
As you get deeper into debt, you’ve also often been contacted by collection agencies asking for a timeline for paying off your outstanding dues.
If you don’t want them to keep chasing you over the overdue money and don’t want to worry about being sued over the debt, “debt settlement loans,” also called “debt cancellation” or “debt adjustment,” can help.
What does “debt settlement” or “debt negotiation” mean?
Debt settlement, also known as debt negotiation, is the process of paying off a debt by paying a portion of it in one lump sum.
What does a “debt settlement” entail for the borrower and the lender?
How does the borrower benefit from such a deal? A debt settlement agreement can bring financial relief to the debtor and put him or her on the path to rebuilding a damaged credit history.
Meanwhile, a debt settlement loan agreement allows creditors to receive at least some of the money owed, rather than no money at all.
In addition, it can mean that the borrower can avoid filing for bankruptcy. However, according to some credit experts, filing for bankruptcy may be a better alternative in some cases.
What does a “debt settlement” entail for the borrower and the lender?
While it sounds like a good deal, paying off debt can be risky as such loan deals can damage your credit rating beyond repair.
In addition, it can take a long time to reach an agreement, often between two and four years. It can be costly when you hire a debt settlement company as you pay fees. So it’s a last resort.
How much does a debt settlement agreement cost you?
Once you have decided on a debt settlement company, find out how much it will cost you to pay off your debt with a loan agreement. Be transparent, however, and make sure the company doesn’t shy away from your cost questions.
Debt service companies typically charge a 15 to 25 percent fee to service your debt. This can be a percentage of the original amount of your debt or a percentage of the amount you have agreed to pay.
Let’s say you owe Dh100,000 and settle for 50 percent or Dh50,000. In addition to the Dh50,000, you could be asked to pay an additional Dh7,500 to Dh12,500 in fees to the Debt Service Agency – which, while significant, is well worth it for those desperate to complete their exorbitant loans.
The risks of paying off debt outweigh the benefits
While paying off a debt through a debt settlement company can lower the amount you owe, take creditors and collection agencies off your back, and even help you avoid bankruptcy, there are risks that can easily outweigh the benefits.
If you’re heavily in debt and trying to pay off your loans, one major risk you don’t consider is that your creditors may not agree to negotiate or settle with your debt settlement company.
This means that there is no guarantee that the debt settlement company can successfully achieve settlement for all of your debts. In addition, there have been several reports that some creditors are even refusing to deal with debt service companies.
Can my debt management company charge me even if all of my debt is unpaid?
If you stop making payments on a debt, you may end up paying arrears or interest. So while it takes your debt-repayment company a longer time to negotiate a lower debt with your creditor, there are fines for late payments — not to mention countless calls from collection agencies.
Keep in mind that debt settlement companies cannot charge a fee until they have reached a settlement agreement, you have consented to the settlement, and you have made at least one payment to the creditor or collection agency as a result of consent.
But you could still pay part of the debt-redemption agency’s full fees on the remainder of your unpaid debt, experts say. If you have five or six creditors and the company pays off one of those debts, it can start charging a fee as soon as it gets a result.
If a debt settlement company has paid off a portion of your total debts that have signed up for their program, they may charge you that same portion of their total fee. Let’s say your total debt is Dh 100,000 and Dh 50,000 of the total amount has been settled, then you may be charged 50 percent of the total agreed fee.
Can my debt management company charge me even if all of my debt is unpaid?
Another key risk: Any delay in negotiating a debt settlement can negatively impact your credit score
A debt settlement company can encourage you to stop making payments on your debt while saving money for a lump sum payment.
But at this point, your creditors may not have settled anything, which means all those payments you miss can end up on your credit reports as overdue accounts.
Your creditworthiness could be affected as a result of arrears, and the creditor could also send your account for collection or sue you for the debt.
Therefore, entering into a debt settlement loan agreement with a firm that specializes in negotiating it should essentially be a last resort. One should always look for alternatives to pay off debt.
The central theses
Before contacting a debt settlement firm, credit experts advise that you should first try to negotiate settlements yourself with credit card companies or other creditors. Offer an amount that you can pay immediately, even if it’s less than what you owe.
If you have credit card debt, consider a balance transfer. A balance transfer is when you move debt from one credit card to another, usually to take advantage of an introductory offer of zero percent on the new card.
Funds transfer cards offer introductory pricing of zero percent for a period of time and may charge a fixed fee or a percentage of the amount you transfer. However, check whether you are paying more money for the interest payments on your current card than the cost of any transfer fees.
Before contacting a debt settlement firm, credit experts advise that you should first try to negotiate settlements yourself with credit card companies or other creditors.
And you should also try to cash out the balance before the card’s promotional period expires to avoid interest on your balance. There are other debt relief and management options if you can’t get a large lump sum to pay off the debt or the credit card company can’t negotiate a settlement.
You can also seek debt counseling to address this situation. Talking to a credit advisor can help you explore your options. However, if you choose such settlement services, the debt management programs are structured to reduce the debt burden of the borrower.
(The debt burden ratio is the ratio of a person’s total monthly payments or obligations on credit cards, loans, or other committed monthly repayments to their total income.)
Additionally, the negotiation skills of a debt settlement company’s experienced mediators definitely provide an added benefit.
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