Does Debt Settlement Work?
A debt settlement is an agreement between a debtor and a creditor to
completely satisfy a debt for a reduced payoff amount. A debt settlement
is used when a debtor is not able to fully meet their debt
responsibilities due to financial problems and efforts by creditors to
collect have failed. The creditor basically agrees to cancel part of the
debt obligation and accept the remaining balance as payment in full. Debt
settlement is also commonly referred to as debt negotiation. Basically, a
debt settlement is the actual agreement, while debt negotiation is the
process used by both parties to reach the debt settlement agreement.
Consumers who utilize debt settlement are usually experiencing true
financial challenges and cannot afford to repay their debts through the
various debt management plans offered by credit counseling agencies, but
still wish to avoid filing bankruptcy. Actually, debt settlement falls
between consumer credit counseling and bankruptcy as a financial solution.
Debt settlement programs are available from specialized debt resolution
firms that set up payment plans and then represent consumers in
negotiating settlements. Often, debt settlement programs are able to lower
monthly payments to about half of the typical minimum monthly credit card
payments and help consumers become debt free in a quicker period of time.
It is essential to select a reliable service provider, since their ability
to deal with creditors is based on experience, contacts and reputation.
Whether a consumer enrolls in a professional debt settlement program or
enters into negotiation settlements directly with their creditors, the
process is basically the same. The consumer will save up financial
resources to build up a settlement fund. When enough funds are available
to make a reasonable settlement offer, the debtor or their debt negotiator
will negotiate with the creditor for a reduced payoff amount, typically
between a quarter to half of the outstanding balance.
When the creditor agrees to a settlement amount, the actual payment is
set and the account balance is considered settled-in-full. The debtor then
continues building funds into the settlement fund to save enough resources
for negotiating a settlement for the next creditor. Basically, the
settlement process is a revolving cycle of saving up money, negotiating a
settlement with a creditor, and then paying off the settlement. This
continues until the consumer is debt free and can start the process of
rebuilding their credit and savings. Through savings, a consumer can start
to build a solid financial foundation, creating true financial security.
