Debt settlement, also called debt negotiation or debt arbitration, is done with a view to reducing the burden of debt. This is an arrangement where both the debtor as well as the Creditor decides on a certain reduced balance for full and final settlement of debt.
Creditors get incentive to go for debt settlement once they get the clue that they will be able to collect almost nothing in relation to the Debt, if the debtor files for bankruptcy. For a borrower or a debtor, the incentive to go for an amicable debt settlement is for avoiding bankruptcy and in order to ethically get rid of the debts.
Debtors should realize that “debt treadmill” is something very difficult to get off. With making minimum monthly payments, a borrower will be ultimately able to clear his debt account in thirty years or so and also will be spending more than ten times the initial borrowed amount. Debt settlement may put an end to the long cycle and make you debt free in three years or even lesser time.
Ways of debt settlement
• Debt settlement companies
Consumers usually go for debt settlement acting on the advice to be found on various websites. They also may hire a lawyer for acting on their behalf or make use of debt settlement companies.
Debt settlement companies generally negotiate with creditors on behalf of the borrowers. They make requests to the creditors for reducing the total debts in return for an arrangement where periodic payments will be made. This form of debt settlement is applicable only for credit card debts and not auto financing, student loans or mortgages.
Debtors make obvious gains through this whole process. The stigma associated with bankruptcy is avoided and debt balances are reduced by 50%. They regain the faith of the creditors. The creditors are assured of the sincere intention of the borrowers for paying the loan back and not filing bankruptcy.
To take advantage of a debt settlement company, a consumer has to have adequate funds over a definite pre – determined time period. After adequate funds have been created, the process of negotiation may start with each individual creditor. The debt settlement company makes a negotiation with the credit card companies for 35 to 50% of the remaining balances. When the consumer makes the payment for the amount agreed upon, the debt settlement company takes a certain portion of the savings from the forgiven debt as its fee.
• Debt negotiating companies
These are also debt settlement companies who work on different principles. These companies help the consumers who lack cash, to make settlement with credit card companies. These companies set up a fund or a “trust” where they take in monthly payments from the consumers. Their idea is to help you save enough money for settling the debt accounts at a subsequent date.
Many people resort to negotiating debt settlement all by themselves. Unsecured debts are quite often settled in this manner. An individual should not be afraid to at least give a try in this regard.