In a Nutshell
The following sections will provide information related to constructing a budget, which is the first step in determining if a debt settlement is a viable option for your situation. These sections will also help you better understand how the debt settlement process unfolds, whether you hire a debt settlement company or negotiate this process yourself.
Written by Upsolve Team.
Updated January 28, 2020
If you’re experiencing financial problems that you would like to resolve as soon as possible, one viable option is attempting to settle your debts for less than what you owe. You can negotiate a debt settlement if you have some money available or can convert some assets to cash. You’ll need to make a single lump-sum payment or two or three installment payments to make a debt settlement work. This may be challenging to pull off, but you’ll have the satisfaction of resolving this debt, avoiding accumulation of interest, and ending non-stop collection calls. While a debt settlement company can help you, debt settlement can be negotiated by anyone. This means that you can work with your creditors directly, if you’d like to.
You may not be a good candidate for debt settlement if you’ve kept your payments current by making the minimum monthly payment. In this case, your creditors will be more than satisfied because they’re receiving payment and, more importantly, accumulating valuable interest on your account. There is no financial incentive for a creditor to settle for less than the balance when an account holder is current. But, if you’re at least two months late making payments on an account, you may benefit from speaking with someone who can help you determine whether settling your debts makes sense for your situation. However, it’s important to remember that any settlement of a debt for less than the amount owed reflects badly on a credit report since it creates an entry that the creditor received less than the full amount owed for the debt. Also, there are tax consequences often associated with this type of debt negotiation as the IRS looks at a debt settlement of the outstanding balance as “forgiveness of debt,” which is usually taxable income. As you can see, there are pros and cons to debt settlement, so this potential debt management solution should be carefully considered before you commit to it.
If you have too many creditors or too few assets available with which to pay your creditors via lump sums, debt settlement may not be the best option for you. You may have more success with either a debt management plan or securing a debt consolidation loan. However, if you can pool the necessary funds to pay a lump sum to at least one creditor and you have only a few types of debts overall, debt settlement may be a debt relief option worthy of your consideration.
Learn More through Free Nonprofit Credit Counseling
Anyone with debt can benefit from credit counseling, provided that they are interested in learning about what their money management and debt relief options are moving forward. Consumers can receive free advice from organizations affiliated with the National Foundation for Credit Counseling (NFCC). During your free credit counseling session, a credit counselor can help you to create a financial action plan to achieve your goals after learning about your income, debts, and expenses. It is additionally important to note that nonprofit credit counseling agencies often offer debt management plans and other services related to consumer finances, such as foreclosure counseling and credit report review. Depending on your circ*mstances, these services may be of value to you.
How to Settle Your Debts in Alabama
The following sections will provide information related to constructing a budget, which is the first step in determining if a debt settlement is a viable option for your situation. These sections will also help you better understand how the debt settlement process unfolds, whether you hire a debt settlement company or negotiate this process yourself.
- Collect the Details About Your Debts
- Collect Details About Your Ability to Settle Your Debts
- Learn About the Costs to Settle Your Debts in Alabama
- Decide Whether to Work with an Alabama Debt Settlement Company
- Research Alabama Debt Settlement Companies
- How to Make Your Debt Settlement Work
- Alternatives to Debt Settlement
Collect the Details About Your Debts
Before making a final decision concerning whether to pursue debt settlement, gather information for the purpose of clarifying all there is to know about your secured and unsecured debts. Gathering detailed information about your debt will help to ensure that you make an informed decision about each of the money management and debt relief options available to you. Account statements within the last two months with each debt’s current balance, interest rate, and monthly payment amount should provide you with these necessary details.
Make sure that you gather this information for all types of debt (even for any that you don’t think that you’ll settle up) so you can keep track of it for later money management and budgetary consideration. A review of your current credit report from each of the credit bureaus will provide a list of your debts and your total amount of debt. This information will help you to help you decide which debts could potentially be resolved by paying a lump sum to your creditors. A credit report also helps if you are in default, since some of your debts, especially credit card debts, may have been sold or assigned to other creditors and collection agencies, and you can identify which ones may have been affected in this way via your credit report.
Collect Details About Your Ability to Settle Your Debts
Unless you have valuable assets that you can sell, you’ll need to estimate your budget to determine whether you have any money available for a debt settlement. You must have resources in the form of cash or liquid assets to take advantage of a debt settlement program. Do you receive income at a consistent rate because you are steadily employed, or does your income vary because you are self-employed? It’s easy to determine income for creating a budget if you receive a regular paycheck. But if you’re self-employed and your income varies from week-to-week, it’s more of a guessing game to arrive at an income total that accurately reflects a typical representative work period.
Next, you’ll need to establish your expenses. Do not include your debt payments. Fixed expenses don’t vary on a monthly basis, while variable expenses fluctuate based on need and other factors. Groceries, gas, and entertainment costs are types of variable expenses, while your car insurance and HOA dues are examples of fixed costs. A good way to estimate all your expenses is to review your bank statements for a year and then average the total by twelve. Statements from a bank account provide a good annual summary of both fixed and variable expenses.
Any money remaining after subtracting expenses from income is the amount of disposable income you generally have available to pay creditors. With all this information at hand, you can consider and decide whether you’ll have enough money to build toward making a lump-sum settlement payment or short-term installment payments into a fund.
Learn About the Costs to Settle Your Debts in Alabama
Regardless of whether you choose to work with a debt settlement company, there are costs involved in settling your debts. You will continue to incur late fees and penalties until the debt is settled.
A debt settlement company can’t ethically collect fees from you until it has settled or resolved your debts. It also can’t make false or unsubstantiated claims about its services. Some companies base their fee structure on a percentage of total debt while others charge based on what they save consumers. A debt settlement company can charge only a portion of its full fee for each debt it settles. If the company's fees are based on a percentage of the amount saved by the settlement, also known as a contingency fee, it must tell you the percentage it charges and the estimated dollar amount this percentage represents.
Decide Whether to Work with an Alabama Debt Settlement Company
An Alabama debt settlement company can negotiate a debt settlement for you, but you can also do it yourself. Settling debts without a debt settlement company will save the fees it charges for its services.
Another advantage to working alone to settle your debts is that any creditors who would normally refuse to work with a debt settlement company may be willing to work with an individual consumer. On the other hand, doing it yourself is time-consuming, stressful, and daunting. Also, if you choose to go it alone, you won’t have access to any help or guidance.
If you’d like to work with a debt settlement company, take steps to protect yourself from scam artists. Consult with the Better Business Bureau, the Alabama attorney general’s office, or other consumer protection organizations to find out about trustworthy, qualified debt settlement companies.
Research Alabama Debt Settlement Companies
It’s important to find a debt settlement company that is qualified and has a good reputation for helping consumers. Good companies inform consumers of the fundamental aspects of their services, such as the cost of services, the expected length of time it will take to achieve results, and even the negative consequences of using a debt relief service.
Some potentially negative consequences if the debt has been delinquent for a long period include a negative entry on your credit report and drop in your credit score, the possibility of legal action; uninterrupted collection actions; and that you may incur additional fees and interest.
A debt relief company also must tell you that the funds, and any interest, in a debt settlement program escrow account, are yours. It must also inform you that you may withdraw these funds at any time without incurring any penalty. Any debt settlement company that charges fees before performing a service is violating the law.
There are currently no specific laws governing the practice of debt settlement in the state of Alabama. All debt falls under the federal jurisdiction of the Fair Debt Collection Practices Act (FDCPA). Consult the Alabama Attorney General’s website for any changes affecting debt collection law.
How to Make Your Debt Settlement Work
Once you’ve committed to a debt settlement program, it’s crucial to pick a sensible, workable monthly payment date. You may want to isolate this payment and make sure the due date is more than a few days away from your mortgage, or even car, payment. If possible, put some cash away for anticipated one-time expenses, such as the payment of income taxes. When possible, put money into an emergency fund.
Alternatives to Debt Settlement
Not everyone is in a position to take advantage of an Alabama debt settlement. However, there are alternative debt management resources available. There are many qualified, nonprofit credit counseling agencies in Alabama. Meeting with one can be helpful because doing so will allow you to receive a personalized action plan tailored to your unique financial circ*mstances. Depending on the particulars of your situation, your credit counselor may recommend that you pursue debt consolidation, a debt management plan, or bankruptcy.
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Alabama Debt Consolidation
There is more than one way to eliminate burdensome debt. Consider consolidating your debts with an Alabama debt consolidation loan, especially if debt settlement is not a viable option for you. Both debt management plans and debt consolidation loans involve rolling multiple debts into one single monthly payment. If your credit score is good or excellent, you may qualify for a new line of credit that you can use as a balance transfer for your existing debt.
Alabama Debt Management Plan
Another form of debt consolidation worthy of your consideration is an Alabama debt management plan. These plans are available all over the country to anyone, regardless of their credit score. You’ll work with a credit counseling agency, which will negotiate with your creditors. Once a DMP is constructed, you’ll make a single monthly payment to the agency, which will distribute your payment to your creditors per the terms of your plan.
Alabama Bankruptcy
If pursuing debt settlement, working through a debt management plan, or securing a debt consolidation loan are not viable options for your situation, it may be time to meet with a bankruptcy attorney. Most Alabama bankruptcy attorneys offer free consultations. If you can’t afford an attorney, Upsolve may be able to help you file for bankruptcy. This option can allow you to either restructure your debt so that paying it off is a more manageable process or allow you to have certain eligible debts eliminated outright.
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