Thursday, January 20, 2011

Self Help Debt Settlement - Steps to Help You Negotiate Your Own Debt (Part 5)

Debt Settlement or Debt Reduction; what is your best choice?

After you have went through you budget, you will be able to know how much money you have left on a monthly basis to contribute towards your debt load. The question you must then consider is if you should work towards a debt settlement plan that will involve having you outstanding debt settled, or a debt reduction plan that involves working with your creditors to execute plan that reduces your interest and fees and allows you to repay what you currently owe. There are advantages and disadvantages to both programs.

Debt Settlement Plan


A debt settlement plan allows you to pay back only a portion that is owed to your lender. An example being if you owe $10,000 a lender will settle with you for a cash payment of $5000.00 or $6000.00, this enables you to resolve your debt with your creditor(s).


Having your debt settled could have an adverse effect on your credit. It is likely that you will be unable to get credit from any company that you have settled debt with. Another negative is that when you settle debt you must pay off the debt in one lump payment (the faster you pay the more you could save). This may not be possible if you are struggling financially.

Debt Reduction Plan


A debt payment plan involves arranging a payment plan that is different from your regular payment plan that was originally required when you started with the creditor. This system has the most positive effect on your credit as the creditor is still able to recover all the money that is owed them. There is also a possibility of being able to have your interest reduced (sometimes to zero percent), so that you will be able to have more of your payment go towards principal rather than interest


If you are carrying too much debt, working out a payment plan that involves continuing to pay on the debt that is owed may not offer much relief. Also, even though this is a more positive option that debt reduction in relation to your credit it could still negatively affect your credit.

So, which of these options should you choose? This really depends upon your current income and debt responsibilities. Certainly, choosing to pay back all the debt with a modified payment option is the most favorable one for your credit, and the one the lender prefers. For example if you currently owe $20000.00 in credit card debt with an average interest rate of 24.99 percent your monthly interest is about $500.00 per month. If you negotiate a five (5) year repayment plan your payments would be about $650.00 per month. By reducing your interest rate to an average of 10 percent this would reduce your interest to about $167.00 per month. If you negotiate a five (5) year repayment plan your payments would be about $425.00 per month. Now imagine if you could negotiate a zero percent interest rate with your creditor(s).

In stating the above, it's important to be realistic, if you are not making any headway now in catching up, working out a payment plan could just continue to bring you hardship. This must be considered. The most important thing to remember is that the debt reduction plan must work for you and your budget. If you choose an option that continues to keep you "tied up" you will run into the same issues.

Ian Stanton
Director of Marketing
B-EZ Enterprises
(480) 278-3717