Debt Settlement

Debt settlement is negotiating for the reduction of the amount of debt, so it is also called as debt negotiation. The debt settlement is suitable for those who are in huge amount of debt and are moving towards bankruptcy. There are many agencies that facilitate debt settlement for their clients. 

They actually negotiate with the creditors to settle the debt for a lesser amount than what was taken by the debtor. But to enroll with a debt settlement agency the total amount of debt must be in between $7,500 and $10,000. A debt settlement is allowed only when the debtor is under serious financial problem.

The situation of debt settlement usually comes when a debtor is not capable of meeting his or her debt responsibility due to financial crunches. Consumers who use debt settlements are those who are experiencing legal financial trouble. The creditor agrees to cancel some part of the debt and accept some remaining sum as the full repayment.

A debtor may register into a professional debt settlement program or the debtor can directly negotiate settlement with the creditor. The process is same in both the cases. On registering with a debt settlement company; the debtor will have to sign a limited power of attorney, so that the company can negotiate on behalf of the debtor. The debtor will have to save up and keep aside some money to put up the settlement fund. When enough funds are raised to make a reasonable settlement offer, the debtor or the hired professional debt negotiator will negotiate with the creditor for a cheap payoff. 

The negotiated amount usually lies in between 25% and 50% of the remaining balance.
Whenever the creditor agrees to a conclusive amount, payment is given and the account is considered as settled.

Not all the debts can be settled in this way. In fact, there is a category of debt that is eligible for the debt settlement. Usually, only unsecured debts like credit cards and medical debts can be discussed for settlement. Secured debts like car loan and home loan cannot be negotiated because in most of the cases creditors can recover the asset purchased with the credit issued to the debtor.

The debtor's benefit for registering into a debt settlement program or doing the direct debt negotiations with the creditors is to pay the debt according to his or her financial ability. Secondly it helps to stay out of bankruptcy, which is marked on the debtor's credit report and can remain up to 10 years. On the other hand it is also beneficial to the creditors because they can at least recover funds that would otherwise be lost if the debtor becomes bankrupt.

Though the debt settlement is beneficial for those who are under serious financial crunch but it also causes problems that are hard to get rid of. Some of the troubles that a person may face due to debt settlement are damage in credit history, increased collection calls, tax penalty, possibility of court case, and the need to settle the debts with all the creditors.