What Is Debt Settlement?

Thursday, March 20th

Living with debt can be a very stressful thing. Every ring of the phone could bring another call from a creditor, demanding money you don't have to give to them.

So what options do you have when the credit hounds are beating down your door?

Debt settlement - also commonly known as debt arbitration, debt negotiation and credit settlement - can be a good option for those who are struggling with debt. A caveat when it comes to debt settlement is that it can negatively affect a consumer's credit, so it should only be considered if a person's financial situation is extremely dire. However, if a person's credit report already is ruined due to failure to repay numerous creditors, the damage already is done and debt settlement will not make much of a difference.

Debt settlement is the final option before full bankruptcy. It is best to avoid full bankruptcy if possible, as it will mar your credit report for 7 to 10 years.

If you decide that the risks of debt settlement are worth the rewards, then you will need to know the best way to go about settling your debt with creditors.

The basic premise of debt settlement is getting a creditor to agree to be paid less than what you actually owe them, and to accept the lesser payment as payment in full. A good debt settlement agency will be able to help a client realize a 40 to 60 percent savings on their total debt.

Most debt settlement companies will establish what is known as a settlement deposit account. Clients will then be advised to stop making payments of any kind to creditors and instead put the money into the settlement account. The debt settlement company will then negotiate a deal on their client's behalf, pulling money from the settlement account to make payments to creditors as needed.

It will generally take three to five years for the settlement process to be complete.

However, there are some cons to the debt settlement process. Aside from your credit report being negatively affected, creditors are not required to accept any settlement offer and can still choose to turn you over for collections. Even if they do accept the offer, interest and penalties will continue to accrue the entire time the negotiation process is underway.

Now that we've discussed the pros and cons of debt settlement, let's review how to find a reputable debt settlement agency.

The first step is to check the reputation of the agency on consumer websites such as the Better Business Bureau. If the agency you are considering using has very many unresolved complaints against them, it should serve as a red flag.

Consumers also inquire as to whether the company has a solid working relationship with creditors and collection agencies. Prior established relationships will go a long way in getting creditors to accept debt settlement agreements.

Lastly, make sure the company provides full disclosure of its fee structures and how all money it collects from you will be used.

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Debt Relief Company FAQ

What is debt relief?

Debt relief is a process that helps people get out from under their ever-mounting financial obligations. This can be accomplished through Debt Negotiation, Debt Settlement, Debt Consolidation or Repayment Plans, among other strategies.

Do I qualify for debt relief?

You'll need to have a certain amount of debt to be eligible for debt relief, which varies according to which relief service you choose. Some require a minimum unsecured debt of $7500, while others specify that you need to owe at least $10,000. Also, some debt relief providers aren't licensed in all 50 states - so you may be eligible for debt relief but the service you're considering isn't available in your state.

How much does debt relief cost?

Believe it or not, many debt relief services are free! Most providers give you a no-cost consultation, analyzing your financial situation and making recommendations tailored to your needs. But, there are some fee-based services, especially if you want someone to negotiate with creditors on your behalf.

Why should I use a debt relief service? Can't I do it all by myself?

Many of the strategies used by debt relief providers can be done on your own, yes. But, in the amount of time it would take you to get up to speed and learn what those strategies are, you could be paying hundreds (or thousands!) of dollars in interest. It's almost always a smarter financial move to have the experts do the work for you.

What should I expect once I sign up for a debt relief service?

The first step is usually the complimentary consultation, where a representative will go over your debt situation and find out your goals, needs and timeframe. From there, it will depend on which approach you decide to take - but, for the most part, the debt relief service will be in charge of contacting your creditors and working out the details for reducing what you owe.

How long will it take to see changes in my debt situation?

No two consumers are alike - and debt relief strategies vary as well. Some services offer relief through a personal loan, allowing you to pay off high-interest debt with a lower-interest arrangement, so naturally your situation will change as soon as your loan is funded and used to reduce your monthly payments. On the other hand, if your service is negotiating with your creditors to reduce or eliminate what you owe, that can take several weeks to months.

Is there a guarantee?

Most of the time, there isn't. A few debt relief services offer a 100% customer satisfaction guarantee, allowing you to cancel your plan without fees or penalties. Read the fine print of any contract before you sign up, so you'll know exactly what's promised - and what isn't.

Are companies offering debt relief legitimate?

Debt relief may sound too good to be true, but it's a legal, well-known method for reducing the debt burden faced by many consumers. Although some fly-by-night services pop up from time to time, most companies offering debt relief have been in business for a decade or longer. You can always check for a company's listing with the Better Business Bureau for further confirmation that it's a trustworthy option for debt relief.

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