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Debt Settlement
Debt settlement, also known as debt arbitration or
debt negotiation, is an
approach to debt reduction in which the debtor and creditor agree on a reduced
balance that will be regarded as payment in full and is a legal alternative to
bankruptcy.
The debt settlement industry has grown into a viable business aimed at helping
consumers arrange favorable settlement with lenders and creditors. Debt
settlement companies became prominent in America during the late 1980s and early
1990s when bank deregulation, which loosened consumer lending practices,
followed by an economic recession placed consumers in financial hardships.
Essentially, the debt settlement company negotiates on the borrowers’ behalf
with creditors to reduce the overall debts in exchange for lump sum payment or
an agreement upon regular payments will be made to equal the settlement amount.
Only unsecured debt can be handled, not federally backed student loans, auto
financing or mortgages. For the debtor, this makes obvious sense – they avoid
the stigma and intrusive court-mandated controls of bankruptcy while still
lowering, sometimes by more than 50%, their debt balances. Whereas, for the
creditor, they regain trust that the borrower intends to pay back what he can of
the loans and not file bankruptcy (in which case, the creditor risks losing all
monies owed).
There can be drawbacks – credit reports may show evidence of debt settlements
and the associated FICO scores can be lowered as a result. There’s always the
possibility of legal action whenever debts lay unpaid. But few creditors wish to
push borrowers toward bankruptcy – and the potential of governmental protection
against all debts.
In order to work with a debt settlement company, a consumer needs lump sum cash
(best scenario), or build up enough funds over pre-determined period of time.
Once enough funds are built up the negotiation process can begin with each
creditor individually. The debt settlement company negotiates with the credit
card companies and collection agencies for 35% - 50% of the existing balances.
The debt settlement companies typically have built up a relationship during
their normal business practices with the credit card companies and collection
agencies and can come to a settlement agreement quickly. Once the consumer pays
the agreed upon amount, the debt settlement companies take a percentage of the
savings of the forgiven debt as the fee. With the current economic crisis, more
and more credit card companies and collection agencies are willing to settle
existing debts.
It is best to seek out a debt settlement company offering a structured flat fee
arrangement, instead of a percentage of your debt fee structure, and a company
that offers an escrow account for your savings toward settlement. |
