Debt Settlement
Debt settlement is when you negotiate with a creditor to pay a fraction of the total amount owed. It is often used in an effort to avoid bankruptcy. Debt settlement programs are often provided by debt settlement companies. These companies set up payment plans, negotiate settlements, and act as a mediator between consumers and creditors.
Creditors are more likely to agree to a debt settlement if you can prove a legitimate financial hardship such as illness, death of a spouse, or sudden job loss. Generally, only unsecured debts, such as credit cards, can be negotiated for settlement because there is no security attached with unsecured debts. The lender can't repossess anything.
Debt negotiation is not the same thing as credit counseling. You should be aware that it may have a negative impact on your credit report. Many states have laws regulating debt negotiation companies and the services they offer. If you decide to work with a debt negotiation company, be sure to check it out with your state Attorney General, local consumer protection agency, and the Better Business Bureau.
Understanding Debt Settlement
- Debt Settlement reduces your current outstanding total balances 25-50%.
- A team of professionals negotiate an agreed payoff amount with your creditors.
- A typical settlement can be accomplished within 36 months or less.
The types of debt that can usually be negotiated are unsecured debt such as:
credit cards, personal debt, unsecured bank loans, medical bills, merchant and store cards, and unsecured lines of credit.
Why Creditors Agree to Accept a Reduced Payment
When creditors lend money they have every intention of getting it back. They will always try to recover loans in default in one way or another. Settlement is an attractive offer that helps creditors get their money repaid without spending any money for collection. For that reason alone most credit card companies and other lenders show interest in negotiating your debt.
If you prefer, you can do it yourself. You will have to contact all your creditors yourself and try to negotiate a fair settlement. Sometimes creditors and collection agencies will not negotiate with consumers directly. In that case, a reputable settlement company can take over the negotiations for you.
Negative Factors to Consider
- Damaged credit.
- Fees paid to settlement company or attorney.
- The money saved must be claimed as income.
- Taxes must be paid on the money saved.
Benefits of Debt Settlement
- Helps you avoid Bankruptcy
- Reduces your personal, business and medical debt.
- One of the quickest ways to reduce unsecured debt.
- Helps to reduce annoying creditor calls.
Which Debts To Settle First
- Higher interest rate debts
- Deliquent debts that are more than a couple of months past due.
- Debts with the lowest amounts owed. This will get them wiped out and off your debt payment list.
