What is Debt Settlement?
Debt settlement or debt negotiation is type of service which is intended to help relief from unsecured loans debt or credit card debt by reducing the total amount of unsecured debt. Usually, outstanding debt can be reduced 40-60% of the original balance. Debt settlement is an alternative to bankruptcy. When you find out that you are unable to meet your financial obligations and you are persistently falling behind your monthly payments, it is time to try to negotiate a debt settlement. In a debt settlement negotiation agreement, lenders agree to accept a payment that is less than total balance of the debt but it’s considered payment in total. The total amount includes all the fees and interest. The debt than will be erased. This can be done via one lump sum payment or interest-free monthly payments. You can contact creditors yourself or you can hire professional negotiators to do a debt settlement work on your behalf. To decide if the debt settlement is the best option for you, you should consider your budget and obligations and deliberate your ability to access money before you decide what monthly payments you can afford to make.
Student Loan Debt Negotiation
Student loan debt settlement is a balance negotiation on your defaulted student loan debt. If your student loan is in default it means that you have missed to make your loan payments for period of time; default usually comes after 270 days of failure to repay your federal student loans. Settlement agreement will become formal after the US Department of Education and the collection agencies accept it.
How to Pay?
To negotiate your defaulted student loan debts settlement, you must be able to make a lump sum payment to bay back most of the loan balance. The Department of Education will entail you to bay back the full sum of the settlement amount within a fiscal year. Such a compromise settlement offer will typically require you to pay the settlement amount in total within 90 days of the date the settlement offer was made. Rarely, the Department of Education allows borrower to pay back the part of the settlement amount through monthly payments, but these payments will generally be paid within one fiscal year.
The Debt Settlement Amount
Department of Education will probably accept a reduced payment for the complete satisfaction of your outstanding student loan balance. The intention of the settlement is to offer students that have defaulted loans a solution to satisfy their outstanding student loan balance. If you are not able to satisfy the loan balance completely, the collection agency or the Department of Education should be willing to offer this student loan settlement. It is unlikely that the Department of Education is going to offer student loan debts settlement that is less than the current recovery rate. The recovery rate is the percentage of disbursements on defaulted student loans that are recovered and includes interest and penalties in addition to the payments to the principal balance.
Types of Settlement
In some cases, the US Department of Education allows private collection agencies to make student loan debt settlements without previous Department’s approval. To get allowed your debt settlement you must agree to one of the three typical types of settlement:
- The first settlement type satisfies only the principal and accrued owing interest.
- Second settlement type satisfies the principal amount plus 50% of the accrued but unpaid interest.
- The third type of settlement satisfies 90% of the current principal and interest balance.
If you offer less than these usual compromises, the collection agency will need to get approval for debt settlement from the Department of Education.
Debt Settlement Pros and Cons
The positive side of student loan debt settlement may include some of the following:
- You will pay back amount that is the same as the original student loan amount you have borrowed;
- You’ll be free of the stress that accompanies this uncomfortable financial situation;
- You will be able to receive additional Federal financial aid for students;
- Administrative wage garnishment will end and your tax return and other benefits wouldn’t longer be seized.
However, student loan debt settlement has some downsides and here are some of them:
- You should go for the debt settlement only if you already have a poor credit history. If not, your credit score will be damaged for a period of time;
- Another negative aspect of student loan debt settlement is that while you are paying the settlement company, most of them won’t inform you how much exactly of your monthly payments is going to your debts and how much is actually being deduced as their fee.
Ensure that you get all the terms of student loan debt agreement in writing and make sure that you understand what you are signing and what the company is willing to do to settle your loan debt.
How to Qualify for Student Loan Debt Settlement?
- Debt negotiation is available on FFEL loans, Direct student loans, Federal Perkins loans and Pell grants of any balance.
- You must satisfy the payment within the approved time frame, which is 90 days from settlement approval 9 (in exceptional cases this time frame can be extended).
- Student loan debt settlements should be paid by a certified method of payment such as money orders, credit cards or cashier’s check.
- Make sure to write a good debt settlement letter – this will help you negotiate your debts.
Debt Consolidation Student Loans
If you have a several student loan debts you may opt to consolidate your debts which means that you can take out a loan to repay other debts. This allows you to consolidate the money you owe into only one payment.
Debt Settlement in Canada
In Canada, it is possibly to negotiate lump sum settlements on unsecured consumer debt such as credit cards, personal loans, lines of credit, and utilities (telephone bills, cable, Internet, and cell phone).
Debt settlement might be right option for you if you meet the following conditions:
- If you are solvent;
- If you have income or the other way to access to money;
- If you have more than $10,000 in unsecured debt.
In case you are insolvent, which means that you cannot pay your bills when they are due, only available options are a consumer proposal and personal bankruptcy. However, if you have provincial student loan debt you might be able to negotiate a settlement on it. You can negotiate with the original student loan lender such as Canada Student Loans to pay a cash lump sum that is identical to a large portion of your defaulted loan balance.
Provincial governments in Canada have their own programs to help borrowers make their provincial student loans repayment more convenient, such as revision of repayment terms, interest relief, debt reduction in repayment and the Repayment Assistance Program (RAP) offered by Canadian government.
Other available options you should consider if you have difficulty paying back your student loans are different flexible student loan repayment options and a student loan forgiveness program offered by the federal government planned to help a selected group of college graduates to pay back their student loans.