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How to Settle Your Debts in Massachusetts

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In a Nutshell

The rest of this guide will cover the steps involved in achieving a successful debt settlement. At the end of this guide, other debt management solutions are explored.

Written by Upsolve Team
Updated March 18, 2020

Residents of Massachusetts from Stockbridge to Provincetown change jobs, start new businesses, get into accidents, become ill, and otherwise face financial challenges every day. These changes understandably cause financial distress for many. For some people, the best solution is to settle their debts. In a Massachusetts debt settlement, you settle your debt for less than the full amount that you owe a creditor. Essentially, you “trade” a lump sum payment (that represents a significant fraction of your total amount due) in exchange for partial debt forgiveness and the closure of your account. Creditors prefer a lump-sum payment but may agree to a short-term installment agreement of two to three payments. Creditors won’t do long-term settlement plans because they don't want to risk further default. 

Debt settlement may be a good option for you if you have enough money (or you have assets to sell) to allow you to make the large lump-sum payments necessary to fund your settlement offers. Debt settlement is an especially good idea if you're already behind on your payments and if your credit score is relatively low already. If you're current on your payments, the lender doesn't have any incentive to settle with you. Additionally, since you're not paying the total amount due, a debt settlement will harm your credit score at first. Settling your debts will put you in a position to rebuild your credit over time. 

Note that you may negotiate your debt settlement yourself or you can hire a Massachusetts debt settlement company to negotiate on your behalf. If you choose to work with a company, simply make sure that they’re reputable first; a lot of scam artists like to take advantage of people interested in debt settlement. 

Learn More Through Free Nonprofit Credit Counseling

Scheduling a free credit counseling session is a good idea for anyone who’s interested in learning about the debt relief and debt management options available to them at this time. When you schedule a no-cost credit counseling session with a nonprofit, accredited credit counseling agency, your credit counselor will look at your debts, income, and expenses to assess your financial situation. You and your credit counselor will set short and long-term goals. At the end of your first credit counseling session, your counselor will recommend a personalized action plan designed to help you meet those goals.

Nonprofit, accredited credit counseling agencies provide free credit counseling to anyone; there are no requirements you must meet to qualify for this no-cost service. Note that these agencies do provide other services that aren't free, but your credit counseling session will be free. These other services may include debt management plan administration, foreclosure counseling, and bankruptcy counseling. Credit counseling agencies don’t provide debt consolidation loans because they don’t function as lending institutions. They also don't do debt settlements. However, credit counseling agencies may be able to recommend a good debt settlement company for you to work with.

When choosing a credit counseling agency, make sure they are a member of the National Foundation for Credit Counseling (NFCC). The NFCC requires that its members meet strict standards. By meeting these standards, the credit counseling agency will provide you with the highest level of service.

How to Settle Your Debts in Massachusetts

The rest of this guide will cover the steps involved in achieving a successful debt settlement. At the end of this guide, other debt management solutions are explored.

Collect the Details About Your Debts

Do your homework before attempting a debt settlement. First, gather your most recent statements from your credit card companies and other creditors. Pay particular attention to the interest rates, minimum monthly payments, and outstanding balances. Pull your free credit report from all three credit bureaus to make sure you are taking all of your debts into account when determining which to settle and how much you can afford to offer your creditors. When negotiating with the creditors, you will use this information (and the information you glean from constructing a budget) to set your target settlement amount. 

When analyzing your accounts, it's a good idea to categorize your debts as unsecured debts and secured debts. Unsecured debts are debts for which there is no collateral, like credit card debts and medical bills. Secured debts are debt for which there is collateral, like car loans and mortgages. Generally, you can only settle unsecured debts. Then, look at any private student loans and federal student loans you have. With private student loans, a debt settlement might be a good option, but your federal loans can’t be settled.

Collect Details About Your Ability to Settle Your Debts

When you don’t have immediate access to the money you need to make settlement offers, a Massachusetts debt settlement company will have you make payments into a special account until you accumulate a large enough balance to make realistic offers. This special account, known as an escrow account, is administered by a third party. Whether building up a balance with a debt settlement company or when paying a short-term installment agreement directly with the creditor, it’s important that you stay on budget. 

When preparing a budget, break your monthly expenses into fixed costs and variable costs. Fixed costs are expenses that change little from month to month. These are expenses like rent and car insurance. Variable costs are different from month to month and are generally based on need and circumstance. These are expenses like groceries and entertainment. It’s easier to reduce variable expenses than fixed expenses as you save to fund your settlement offers over a 2-3 month period. For example, you can clip coupons or use a grocery store like Aldi to save money on groceries. For budgetary purposes, figure out the average of different variable expenses for the last few months by looking at your credit card and bank account statements.

Using your retirement account to settle your debts is one of the worst financial mistakes you can make. First, if you are under 59 1/2 years old, the IRS will assess a tax penalty on this taxable income. For retirement plans that defer taxation until withdrawal, you have to pay income tax on anything withdrawn from the retirement account regardless of your age. Losing the exempt status of your retirement account is even worse than the tax consequences. If you withdraw your money from a retirement account it’s no longer exempt from your creditors. Why would you use this money to pay your creditors when there is no legal way for your creditors to get this money? If you’re thinking about raiding your retirement account to fund your settlement offers, resist this urge. 

Learn About the Costs to Settle Your Debts in Massachusetts

As you enter the debt settlement process, you will incur late fees due to nonpayment. You will incur other fees and penalties due to having defaulted on your accounts. Of course, you hope that you will be able to settle these debts at such a low rate that these fees won't matter in the long-run, but it is a risk you take as no creditor is obligated to accept a settlement offer. 

Additionally, Massachusetts debt settlement companies charge fees for their services. If you use a monthly payment plan to build up balances for settlement offers, you'll also incur the costs from the third-party administrator of your escrow account. The Federal Trade Commission (FTC) requires all American debt settlement companies to hold your money in an escrow account, so you can’t avoid this cost unless you choose to negotiate with your creditors directly. 

Decide Whether to Work With a Massachusetts Debt Settlement Company

You can negotiate your own debt settlement. If you like to negotiate and you're able to keep up with a lot of facts and figures, you may be a good candidate for a “do-it-yourself” debt settlement. If you do the negotiating yourself, make sure to get a written settlement agreement from the creditor before paying anything. 

However, there are several reasons that it may be a better idea to hire a Massachusetts debt settlement company instead of pursuing debt settlement yourself. Debt settlements take a lot of time, effort, and patience. Do you have the patience for long waits on the phone? Do you have the debt negotiation skills to handle the creditor's professional negotiators? Do you have the insider knowledge to know what offers the creditor will accept? For many, hiring a debt settlement company is preferable to a DIY approach, provided that the company in question is reputable.

Research Massachusetts Debt Settlement Companies

Before signing up with a Massachusetts debt settlement company, make sure you understand their prices, their terms of services, and how they calculate the total fee they charge you. Ask the company what percentage of each outstanding debt you must have before they will make an offer to a creditor. They must give you this information, by law. If the company tells you to stop making payments so that it will enhance its negotiating position, there are several things the company must also tell you. They must disclose that not making the payments can damage your credit report. They must tell you that the creditor can add more fees to your debt. They must let you know that your creditors may sue you and get a judgment against you.

There are a few red flags to be aware of when picking a debt settlement company. If the debt settlement company makes guarantees, it's a bad sign. There is no way for a company to know how a negotiation will turn out. Another bad sign is if the company charges you a fee before they settle any of your debts. The FTC forbids this practice. It's best to hire a firm that settles based on a contingency fee. That is, the company isn't paid unless they achieve a successful outcome for you. 

Before doing business with any debt-relief company, do some research on the site for the Better Business Bureau to see the firm's rating. In Massachusetts, you can check for complaints on a Massachusetts debt settlement company at Attorney General’s Complaint Database. This web database is currently in its pilot phase. It's a good idea to use the Attorney General's Consumer Advocacy & Response Division, Consumer Hotline at this phone number: (617) 727-8400. Ask them about any complaints that have been filed in regards to the Massachusetts debt settlement company you're considering hiring.

How to Make Your Debt Settlement Work

When building up a balance with a Massachusetts debt settlement company or paying a short-term installment settlement agreement directly to a creditor, it's important to stay on budget. When preparing your budget, make sure to set aside money for expenses that occur less often than monthly. Examples of these types of expenses are quarterly or annual auto insurance payments. You don’t want to be caught by surprise when these expenses come in. If you're making payments to build up your balance with a Massachusetts debt settlement company, make extra payments when your budget allows. This will get you to the negotiation phase quicker.

Also, note that credit card agreements allow credit card companies to check your credit report at any time. There can be problems with keeping credit cards while negotiating a debt settlement. If you're using other credit cards while you're trying to settle with one credit card company, the company you're trying to settle with can see this on your credit report. This could cause the company to demand more money from you for a settlement. The credit card companies for the cards you're trying to keep could check your credit and see that you are attempting to settle with other credit card companies. This will raise concerns that you may be too much of a "credit risk." They may reduce your credit limit or even close your accounts. This could happen even if you have a zero debt amount on the card. It may be a risk worth taking, but it is a risk nonetheless.

Alternatives to Debt Settlement

Debt settlements are helpful for many people, but for most people, there are better debt management alternatives available that better suit their unique situations. Debt settlements work best for people whose credit score is already low, but at the same time, they have enough money to make large lump-sum payments. Other solutions are generally better suited for people who can't afford to make large lump-sum payments or who want to maintain an excellent credit score. Often, debt settlements will harm your credit more than bankruptcy. This is because a Chapter 7 bankruptcy will eliminate (discharge link) a wider range of debts and it’s a quick process. Debt settlements usually take longer and the outcome is unpredictable. 

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Massachusetts Debt Consolidation

A Massachusetts debt consolidation is a good solution if your credit score is good enough to secure a debt consolidation loan large enough to pay off the unsecured debts you’re eager to streamline. A debt consolidation loan can be a personal loan, credit card balance transfer, or home equity line of credit. This approach allows you to pay off your debts and (ideally) be left with a single account with favorable terms to be paid monthly. 

Massachusetts Debt Management Plan

If your credit score isn't high enough to get a favorable debt consolidation loan, a Massachusetts debt management plan may be the best choice for you. In a debt management plan, instead of using a loan, you make a single monthly payment to a credit counseling agency. The credit counseling agency negotiates more favorable terms for your debts and takes care of distributing your single monthly payment to your numerous creditors per the terms of your plan. This makes it possible to make payments that are lower than the combined minimum payments on your debts and have your debts paid off in a shorter period of time than they would be otherwise.

Massachusetts Bankruptcy

A Massachusetts bankruptcy is a debt-relief option that everyone should learn more about. By having a basic understanding of bankruptcy, you will understand how far the law allows you to go when it comes to eliminating debts outright. Take a close look at the Upsolve Learning Center to gain a better understanding of bankruptcy. Upsolve provides a way for you to file your own Chapter 7 bankruptcy in cases that don't require the assistance of an attorney. 

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