Debt settlement is an alternative to bankruptcy which assists consumers who have significant debt due to personal reasons, poor money management or medical hardships. Debt settlement involves negotiating with your creditors to settle your debt for a reduced amount. Normally, the settled amount is 30 to 50% less of the total amount of debt you owe. In other words, if you owe a creditor $12,000, you may be able to reach a settlement of $6,000, with no further balance owed to that particular creditor.
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People suffering from overwhelming debt can either settle debts on their own or can enroll with a debt settlement company. Once you are registered with a professional debt settlement company, you will be represented by an attorney who will negotiate with the creditors to settle your debts.
There is confusion amidst the masses regarding debt consolidation and settlement; most of them are under the misconception that both the options are same. Settlement services are different from consolidation as in a debt settlement program you do not send regular monthly payments to creditors. Instead, you start accumulating money into a savings account each month and once enough money builds up, the company (incase you are seeking help from a professional debt settlement agency) negotiates with your creditors to accept a lump sum payment.
Creditors usually prefer to collect the full amount you owe but once they realize that you are going through significant financial hardships and are trying to avoid bankruptcy they agree for settlement. Most of the creditors are open to debt settlement because they know that if you file bankruptcy, they will be receiving no payment at all. In case sufficient amount of money is not available for a lump sum payment then creditors even agree to accept the settlement amount over a period of 3-10 installments.
Debt settlement is a viable debt solution for people who can no longer afford their monthly payments but want to eliminate their debts. However, every one can not avail the settlement services. In order to qualify for debt settlement, your accounts must be delinquent, because creditors would not like to settle the accounts that are current. Another factor to take into consideration is the availability of funds. You must be able to accumulate the requisite settlement funds to your creditor before or on the agreed date; otherwise the settlement agreement will become null and void.
Another factor that you should consider prior to settling your accounts is its negative affect on your credit. However, if you have already missed payments or are behind the due date, or you might be shortly, then your credit is already impaired.
When you are in a debt settlement program all of your accounts will fall behind, as a result your credit will get affected. But once your accounts are settled and you pay the agreed settlement amount to all of your creditors, the accounts will be reported as settled with a $0 balance.
Debt settlement gives you an opportunity to get you out of debt faster than many other debt relief options so that you can begin reestablishing your credit sooner.
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