What is Debt Settlement, and when is it Useful?


Millions of Americans live life under the shadow of their debt. Living life paycheck to paycheck and handing over huge chunks of your salary to creditors each month is a sad reality for many, and often it can feel like there’s no way out.

If you’ve got more debt than you can realistically pay off, one of your options is to enter debt settlement negotiations.

Settling a debt basically means that you persuade a creditor to accept a final payment from you (the consumer), which is less than the amount you owe. This, however, is easier said than done.

It is possible to enter debt settlement negotiations on your own, however the process can be complicated and mistakes can be expensive, so most people choose to hire a company that specializes in the settlement of debt.

No debt creditor will accept a settlement from a consumer who has thus far stayed on top of all payments, because this fact alone is enough to make them believe that the consumer is capable of paying off the entire amount. So, your first step in your debt settlement negotiations, regardless of if you’re flying solo or if you’re debt settlement agency is working for you, is to stop making payments.

If you are a client to one of the many debt settlement companies, normally they will request you continue to make payments, but instead of making them out to the creditor, you will pay the company, who will hold the money aside for you (while also subtracting fees to pay themselves with).

This time period during which you are refusing payment is where the risk factor comes in, because during this time where you aren’t making payments, you will continue to rack up late fees, collection notices and possible even threats of lawsuits, and your credit score will become something depressing.

Once you are so behind on payments that you can convince the debt collectors without a doubt that there is no possible way for you to ever pay off your debt, you will be able to negotiate a debt settlement with them. For debt collectors, settling is a better option, because in this scenario at least they will receive something and if you declare bankruptcy they will get no money out of you at all.

It is important to understand that debt collectors are under no obligation to accept settlement deals, so there is no guarantee that this plan of action will work.

Another important fact to keep in mind, is that if the debt collection agency does accept your settlement plea, they will still report what happened to the credit bureaus, and it will go on your record exactly how much you owed and how much you ended up paying as part of your settlement.

Because debt settlement carries quite some risk, most financial advisors recommend consumers who are having trouble paying off their debt to either seek debt management counseling programs, or, declare bankruptcy. A debt management program will typically not make the total amount you owe any less, but it can reduce interest rates, or make monthly payments lower. Declaring bankruptcy will erase all your debts, but hurt your credit scores considerably for the next 7-10 years.

If you are already at a point where you have fallen behind on your payments, it can be well worth a try to settle your debt.