What are the risks of Debt Settlement with Banks

Share on facebook
Share on twitter
Share on linkedin

Debt settlement is basically an agreement between a lender and a borrower wherein the former permits the latter for a one-time large portion payment towards an outstanding balance and in return, the remaining balance will be forgiven. It usually happens in cases that the lender is no longer able to pay the full amount so the creditor will just agree to protect its financial bottom line.

Although debt settlement might sound good news for some lenders, there are actually a lot of downsides that must be considered. Therefore, we will be discussing in this article some of the risks of choosing debt settlement as your option.

The Risks of Debt Settlement with Banks

You might suffer from large fees

Even if debt settlement services will vary depending on the laws mandated by the local or state government, the charges from a third-party debt settlement professional are high. Most likely, they will charge about 15 to 25 percent per resolved debt. Meaning, if you want to settle a total debt of $100,000 then you will be charged 15 to 25 percent based on that amount, i.e., $15,000 to $25,000, and not on the final repayment that has been negotiated or settled.

It is not as quick as you imagine

Debt settlement for beginners might be a hefty concern. There is a need to deposit a large amount of cash into a settlement account. Right after, the lawyer or debt settlement company will commence negotiating with your creditors to come up with a solution. However, the entire process of settling debt might take up to three to four years.

You might pay greater than what you owe

Once you begin processing your debt settlement, your lawyer or debt settlement company will strongly recommend that you must seize your payments on your debts. But that doesn’t actually provide you relief because the interest will still be accruing even if you’ve already stopped paying. Moreover, you will face high late fees that will add up to your existing outstanding balance in which you might pay greater than what you owe.

Negative impact on your credit score

Obviously, if you cannot pay what you owe, your credibility will be immensely damaged. Since creditors will not likely negotiate or settle on someone who has still the ability to pay monthly payments, your lawyer or debt settlement company would strongly suggest you to stop making payments. Thus, resulting in a negative credit record especially when your credit report says “settled” instead of “paid”.

The Risks of Debt Settlement with Banks

Most creditors will not approve any credit application from a debtor who has a settled debt because it only means you have less ability to pay what you are trying to owe. It will put too much risk on the side of the bank or creditor since their operation might be compromised once they allow such ineligible debtors.
That is why if you are an Israeli who has decided to choose debt settlement as a way to resolve your bank loans, then you might need the best lawyer like Adv. Maor Levi to back you up on your הסדר חוב מול הבנק.