What is Debt Settlement?
Debt settlement is a method that is used to alleviate debt by negotiating with creditors to accept a portion of the amount that is owed to settle outstanding debt. Also called debt negotiation, this method of dealing with deep debt should only be used after other methods have failed, since a borrower's credit report will be negatively affected.
Debt Settlement Relieves You of Your High Interest Loans in One Payment.
Debt settlement is a process that can take months or possibly years to accomplish. Many borrowers turn to debt settlement companies to help them with the process; these are experts who have successfully negotiated with creditors to agree upon reduced payments for borrowers with debt issues. Debt settlement companies are successful because creditors would rather receive a portion of the payment that is due rather than see the borrower go into bankruptcy, in which case the creditors often receive nothing.
The debt settlement process can vary a bit from one debt settlement company to another and depending on the individual borrower's circumstances, but the basic process is as follows:
- The borrower contacts a debt settlement company and signs with them to allow the company to negotiate with creditors on behalf of the borrower. In return, the borrower agrees to pay a fee, typically 15% - 18% of the total debt, to the settlement company.
- The borrower stops making any payments to the creditors and refers collections calls to the settlement company to handle.
- The borrower makes a monthly payment to the settlement company, who accumulates the money in a trust account for the borrower.
- The settlement company contacts the borrower's creditors to open negotiations to settle each debt. The settlement company also deals with any telephone calls regarding debt collections.
- After agreements with the creditors have been reached and the money in the trust account is sufficient to cover the agreed-upon amounts, the settlement company makes payments to the creditors.
- The creditors report the borrower's accounts as "settled" to the credit bureaus.
The entire debt settlement process can take up to four years to complete, but in most cases, borrowers end up paying only 40% to 60% of their total debt.
Debt settlement advantages and disadvantages.
Debt settlement allows you to avoid bankruptcy, get out of debt with just one payment, eliminate extra charges, elude unfair collector practices and various legal actions on the side of your creditors. All medals have two sides however and so is the case with debt settlement. In addition to all the benefits it brings, you need to consider the following downsides:
- For one thing, the borrower's credit score will drop, since creditors will initially be reporting the accounts as late and then eventually will report them as settled. A credit account that shows "settled" is a negative mark on a credit report as compared with "paid in full."
- Another downside of the debt settlement procedure is that the borrower will owe income taxes on the amount of their debt that is forgiven. This money is known as cancellation-of-debt income, and as such is taxable.
- There are reputable and honest debt settlement companies, but there are also those that are misleading and do not act in the best interests of the borrower. Sometimes the borrower can end up paying more over time to the debt settlement professionals than they would have paid directly to their creditors. For these reasons, borrowers should choose a debt settlement company with great care and check references before proceeding.