Debt Settlement – Why You Should Consider Negotiating Your Unsecured Debts

Debt settlement is a negotiation made with the unsecured lender of a debtor. Commonly, lenders agree to forgive up to half of the original debt: maybe around 50%, although results may vary widely. When negotiations are completed, both parties submit documents to the court which indicate what the exact amount of debt is and what will be paid. The court then hands down a decision and the creditor agrees to settle for a lesser amount. This is the beginning of the repayment plan, which is also known as debt settlement.

Debt settlement may be voluntary or involuntary. For example, if the consumer has been laid off, the government can settle this through direct payments and loan forgiveness programs. This would not apply if the creditor had filed for bankruptcy protection and could not settle the account due to the restrictions under the new law.

Usually the consumer pays one lump-sum payment at the beginning and the remainder over time until the full amount is settled. They are required to settle for this amount even though it may not necessarily be lower than what they owe. The creditor agrees to this because it allows him to take some of the money he might have lost in future interest rates. Usually debt settlement requires the agreement of at least three third-party companies.

Professionals help consumers negotiate debt settlement on their own or via a professional debt settlement company. If a person hires an agency to negotiate their debt, these professionals may charge a fee of around five percent of the outstanding balance. Once the negotiation process has begun, the professional helps consumers in creating a realistic budget and negotiating the payment plans for them. The professional can also negotiate for the elimination or reduction of late fees and penalties.

One of the most important reasons consumers need to use debt settlement services is that they can avoid filing for bankruptcy. Bankruptcy, while it may seem like the best option when dealing with large amounts of debt, actually causes a lot more damage to the credit report than it does to the consumer’s financial life. Debt settlement will result in the creditors agreeing to accept a reduced amount for the outstanding balance. This is a much less damaging method of dealing with a debt problem then filing for bankruptcy would be. Also, filing for bankruptcy would force consumers to wait a long time before being able to buy another home or refinance their mortgage, something that settlement does not require.

When negotiating your debt settlement, you are advised to ask the creditors about the payment plans that they offer. Some creditors will offer a lump sum payment while others might want to settle for a low interest rate on a monthly basis. It is important to ask these creditors how long the payment plan will take and how much the interest rate will be. It is usually better to get the creditors to agree on a longer payment schedule than it is to agree on a high interest rate with no flexibility. Remember that if you have the money to settle your debt quickly you should take advantage of it; otherwise, you will risk losing any money you have already borrowed to settle the debt quickly. For details on debt settlement visit