How to Calculate a Debt Settlement

While debt settlement is one of the best ways of getting out of debt, pros and cons are attached to it. Creditors only agree to the calculation of a debt settlement when they are certain that the debtor will not be able to pay off the entire loan amount and they want to get back at least part of the money owed to them. Calculation of a debt settlement and payoff is more favorable to the debtor because he pays less than the total amount owed.

Instructions

1. Calculate the debt-to-income ratio, which will give you the percentage of your income that goes toward payment of interest on existing debts.

2. Add together your total monthly debt, which comprises house rent plus credit card payments plus car loan payment (if applicable) plus all other payments made on outstanding expenses.

3. Divide this figure by your total monthly income. Your annual income divided by 12 months will give you this figure.

4. Take the above amount and multiply by 100. That is the percentage of debt-to-income ratio.

Tips & Warnings

• When trying to find out how to calculate a debt settlement it is always best to weight the pros and cons of this method before deciding on your settlement process. On the positive side, you will be paying your creditor less than what you actually owe, which can amount to as much as a 40 percent to 60 percent reduction in repayment depending of course on the debt settlement amount agreed upon. Calculating a debt settlement is a far more convenient option than opting for bankruptcy, which will reflect on your credit history for the next seven years. You won't really need a lawyer to calculate and put into effect a debt settlement, as it is a fairly simplified process. Skillful negotiation will enable you to get interest and other payment delay fees canceled. Finally, a one-time payment to cancel out the debt will bring you enormous peace and satisfaction.

• On the negative side, your credit score will be affected because debt settlement is a form of debt evasion. The law stipulates that any saving through debt settlement above an amount of $600 is taxable. Debt settlement is not meant for financially sound people; only those in dire financial straits can make use of this method.

References

• Debt Settlement Calculator
• Consumer Laws on Debt Settlement