What Is Debt Resolution?
- Debt resolution and debt settlement are not the same.
- Debt resolution and debt settlement can both help you reduce your debt.
- The right approach for you depends on your income, credit rating, and amount of debt.
When debt becomes overwhelming, there are different approaches you can take to manage it. Debt resolution is one option you might consider to avoid bankruptcy.
With debt resolution, an attorney negotiates with your creditors on your behalf to make your payments more manageable. Debt resolution falls under the same umbrella as debt settlement, but they don’t work the same way.
If you’re looking for relief from debt, understanding how debt resolution works can help you decide if it’s right for you.
What Is Debt Resolution?
Debt resolution is a type of debt relief in which an attorney works with your creditors on your behalf to find the right repayment plan for you. The end goal is to make your debts more manageable so that you can pay them off.
Debt resolution isn’t the same as filing for bankruptcy, which can wipe the slate clean on certain financial obligations. Instead, a debt-resolution attorney can help with:
Getting monthly payments reduced
Lowering credit card interest rates
Reducing or eliminating fees
With debt resolution you’re still expected to pay what’s owed, but doing so may be easier, depending on what your attorney can work out with your creditors. While your attorney negotiates, he or she may encourage you to make the minimum payments and stay current on your accounts. You may also be required to close your accounts as a condition of debt resolution.
Going through debt resolution can help you head off a creditor lawsuit, too.
Legally, debt collectors can sue you for unpaid debts. If the creditor wins its case, you could end up with a judgment on your credit report. The creditor or debt collector can also go after your bank account or try to garnish your wages to collect on the judgment.
If a creditor threatens to sue, a debt-resolution attorney could help you work out an agreement to pay before the case makes it to court. That could spare you the credit-score damage a judgment can cause. And you won’t be subject to garnishments or levies, either.
How to Find a Debt-Resolution Program
There are different types of debt-resolution programs. The one you seek may depend on what kind of debt you owe.
For example, the U.S. Department of Education has a debt-resolution program for people who fall behind on federal student loans. Some companies offer debt resolution specifically for IRS tax debt as well.
If you’re looking for general debt resolution for things like credit cards or unsecured loans, you can look online for help. A simple Google search can turn up both debt-resolution companies and debt-resolution attorneys, nationally and in your area.
Researching and finding the right debt-resolution program to meet your needs is important. Asking the following questions can help you understand your options better:
What services does the debt-resolution company/attorney provide?
Do they handle a specific type of debt (tax debt, credit cards, etc.)?
What fees apply for debt-resolution services?
Will I need to close my credit-card accounts?
What kind of time frame can I expect for a resolution?
A debt-resolution firm might offer a free initial consultation, but then charge a retainer if you agree to use its services. The firm may also charge a flat fee or bill you hourly.
It’s very important to understand how a debt-resolution firm charges its clients. (Hourly fees, for example, could quickly increase if your creditors resist your attorney’s efforts.) Weighing the potential cost against your potential savings can help you decide if hiring a debt-resolution expert is worth it.
Also, consider how quickly you might be able to pay off debts this way. A different solution might be better for you, depending on your preferred timeline.
Pros and Cons of Debt Resolution
Debt resolution can help you get a better grip on your debt; but debt resolution still isn’t suitable for everyone. So it helps to weigh the pros and cons before you commit.
On the pro side, there are some excellent reasons to consider debt resolution:
Your creditors may be willing to reduce interest rates or waive fees.
Debt resolution can help you avoid creditor lawsuits.
Resolving debts through an attorney could keep you out of bankruptcy.
You can pay off your debts at a pace that works for you.
But there are also some cons associated with debt resolution:
Creditors aren’t obligated to agree to the repayment terms established by your attorney.
Your credit score might suffer if you (1) pay late, (2) pay less than what’s owed, and/or (3) have to close credit card accounts.
It may take you longer than you’d like to get out of debt.
Hiring an attorney for debt resolution could be costly.
As mentioned, some debt-resolution attorneys offer a free consultation. So if you’re on the fence about whether debt resolution suits you, it could make sense to schedule a free meeting. The attorneys you visit for a free consultation can explain how their debt-resolution services work, so you can then decide whether to use them.
Debt Resolution vs. Debt Settlement
Debt resolution and debt settlement often get lumped together. And while they both have a similar goal of helping you get out of debt, they also go about it differently.
With debt resolution, you seek a workable debt-repayment solution for yourself and your creditors. A debt-resolution attorney acts as a go-between and hammers out the details. The attorney might negotiate a forbearance or more affordable repayment terms. Debt-resolution attorneys may recommend bankruptcy, or they may attempt to settle your debt.
Debt settlement, on the other hand, is very specific. It means getting your creditors to agree to accept less than what’s owed as payment in full. Typically, creditors are only willing to do this when you’ve fallen significantly behind on payments. Creditors may prefer to get something rather than nothing, so they’ll agree to let you settle.
For example, say you owe $5,000 to a credit card and you haven’t made payments in nine months. The credit card company might agree to accept $3,500 as payment and forgive the other $1,500, just to recoup some of its losses.
Debt settlement is something you can do yourself. If you’re not comfortable negotiating with creditors directly, however, you could hire a debt-settlement company instead.
The debt-settlement company might direct you to stop making payments toward your debts and redirect that money to a savings account. Meanwhile, the debt-settlement company works to reduce the total amount you owe. The debt-settlement company then uses the money you’ve saved to pay off your creditors.
Similar to debt resolution, debt settlement could help you avoid creditor lawsuits or bankruptcy. You may pay a fee for the debt-settlement company’s services. In terms of the credit-score impact, debt settlement can be damaging because it usually requires you to be behind on your bills. Payment history accounts for 35% of your FICO credit score and even one late payment can cost you a significant number of points.
Here’s a quick comparison of debt resolution vs. debt settlement.
|Debt Resolution||Debt Settlement|
|Purpose||Can help make debt repayment more manageable||Allows you to pay off debts for less than what’s owed|
|Who does it?||A debt-resolution attorney||A debt-settlement company (consumers can also do debt settlement on their own)|
|Cost||Debt-resolution attorneys may charge a flat or hourly fee||Debt-settlement companies typically charge a flat fee for their services|
|Credit-score impact||May hurt your score if you pay late or close accounts||If you’re late on payments to settle, that can hurt your credit scores|
What kind of debts are resolved in a debt-resolution program?
Generally, debt-resolution programs are designed to help you with unsecured debt. That includes credit cards and unsecured personal loans. If you need help with tax debt or federal student loans, there may be debt-resolution companies or attorneys that specialize in those types of financial obligations.
How does debt resolution affect your credit?
Debt resolution can affect your credit in different ways. For example, you may lose some points from your score if you miss a payment during the negotiation process or if you pay off a debt for less than what’s owed. On the other hand, debt resolution could help your score over the long term if you’re able to make a noticeable dent in what you owe and you’re paying debts on time each month.
Is debt resolution the same as debt settlement?
Debt resolution and debt settlement are often used interchangeably, but they mean different things. With debt resolution, an attorney negotiates with your creditors on your behalf to make your debts easier to manage. With debt settlement, you’re trying to get your creditors to agree to accept less than what’s owed. You can do debt settlement yourself or hire a debt-settlement company to negotiate for you.
Is it good to settle debt?
Settling debt can provide some financial relief, since you won’t have to pay anything else once the settlement is finalized. But debt settlement can hurt your credit scores, which could make it difficult to qualify for new credit. Depending on how you decide to handle debt settlement, it could also be costly if you’re paying fees to a debt-relief company.