Debt Settlement One Way to Avoid Bankruptcy

Credit Card Debt Negotiation Services Can Shrink, Eliminate Debt

Jun 22, 2009

Debt settlement companies offer programs to cut debt in half, shorten or lengthen payment terms - but these services don't always help & can harm credit score ratings.

Credit card debt looms like a grey cloud over millions of people worldwide, and it can be difficult to dig out of a deep financial hole. Enter debt settlement companies which promise relief – they can cut debt in half and save consumers thousands of dollars in interest and fines, without declaring bankruptcy. Sound too good to be true? It just might be.

What is Debt Settlement?

Debt settlement is an arrangement made between a debtor and creditor to change the terms of a debt or forgive part of the amount so long as the rest of the debt is repaid. Credit card companies may be willing to agree to accept a smaller amount in repayment if an account holder is in financial trouble because if they don't, the debtor may declare bankruptcy and they'll receive nothing.

Debt settlement can be undertaken by an individual, on his or her own behalf, or it can be conducted by a debt settlement company. Credit card debt settlement is the most common kind, but settlement is also an option for unsecured loans, unsecured personal lines of credit, and medical bills. Debt settlement cannot be used on secured loans like car loans or mortgages, payday loans, student loans, government issued loans, rent, utilities, or any loans that are pending lawsuits.

How Debt Settlement Works

Debt settlement is also known as "debt arbitration" and "debt negotiation" because it means negotiating the terms of the debt with a creditor. Credit card companies are usually only willing to talk about debt settlement with an account holder once he or she is three to six months behind on payments, and even then it's not easy to make headway against the regulations of a company like Visa or MasterCard – although it is possible.

To simplify things, many consumers turn to debt settlement companies that offer services to handle all the messy details of the negotiation – for a fee, of course. These fees range from an up-front payment to huge percentages of the debt that is being settled, and are very difficult to find out in advance.

Debt settlement companies will usually "buy" the debt from a creditor for 20-50% of the debt's original amount. They then collect monthly payments until the customer has paid off an agreed-upon amount of the debt – anywhere from 35-75% of the original debt – and the debt settlement company pockets the difference.

The Downside of Debt Settlement

Debt settlement has several disadvantages. In most cases, it leaves a mark on the credit rating not quite as serious as bankruptcy, but bad enough in itself. It also costs a substantial amount – often in the form of up front fees, and sometimes in a fee that is taken off of each payment before it is applied to the debt.

Some debt settlement companies, usually called "debt negotiation" companies, don't pay off creditors at all – instead, they collect monthly payment from the debtor and hold them in trust until the amount has been collected in full.

The worst of these kinds of companies – second only to those that are entirely scams – don't contact creditors or do anything to lessen the impact of late payments. This leaves credit accounts delinquent and may mean that customers are subject to late fees, higher interest rates, collection calls and even lawsuits. Once a lawsuit is brought against a debtor, debt settlement services can no longer help and any money saved may be lost.

Debt settlement is useful for some, but it's only a step or two better for your credit rating and your budget than declaring bankruptcy. Anyone thinking of using a debt settlement company should take care to ensure that they use a reputable firm that offers – and delivers on – the right services.

Sources

The copyright of the article Debt Settlement One Way to Avoid Bankruptcy in Bankruptcy is owned by Victoria Anisman-Reiner. Permission to republish Debt Settlement One Way to Avoid Bankruptcy in print or online must be granted by the author in writing.