What is a debt settlement?
Debt settlement is the art of negotiating with lenders to ask for a reduction in debts. Settlements can work if both parties can come to an agreement, primarily of the type that would benefit both parties, lenders, and borrowers.
Why would lenders allow debt settlement?
Lenders allow debt settlement if the benefits to them outweigh the losses they might incur. For instance, if a person were to file bankruptcy, the mortgage lender would face a tarnished reputation when a borrower filed bankruptcy also. In contrast, the lender would be able to recover at least a portion of the loan. A person or company can ask for a settlement for a portion of the total amount owed, which can sometimes be up to 50 percent less than what is owed in full.
Different types of settlements
There are different ways to settle a debt. A person can ask for partial payment in full, which can absolve the total amount owed to the one who was lending, and in some cases, the total costs to file and appear in bankruptcy court. In addition, partial payment can be based upon the amount of income the consumer actually earns.
Another form of repayment is to lower the amount due to a long-term payment option. This option allows the borrower a set amount of monthly payment over a lengthy period of time. It is substantially lower than the attorney fees and general court costs of bankruptcy. Additionally, individuals with low credit scores and those who cannot afford to pay upfront for the services of a bankruptcy attorney can gain long-term payment options.
Factors that will affect settlement rates
Debt settlement rates vary greatly depending upon credit companies, the total amount due, and the amount of in-house liens on the debt. Rates can reach as high as minor charges on credit cards.
Late payments on other credit card bills can negatively impact credit ratings. People who make late payments may also assess late fees on their credit card bills. If the amount due is reasonably low, debt settlement rates are not likely to be very high. However, if the amount due is significantly higher than the income that a person obtains in wages, debts, or tax liens, the fees on settling the loans can very likely be very expensive.
If a person is several months or years behind in all the payments, the creditor may enter into a delinquent status (which means that they have little hope of recovering any amounts owed), therefore causing the account to be sent to an outside collection agency. Once this happens, debt settlement is feasible, with the percentage of people able to obtain such a service being about 70 percent in all cases.
Potential benefits of Debt Settlement
A major advantage of debt settlement would be that the principal and interest fees associated with credit cards or loans are reduced or eliminated altogether. This can free up a lot of income, which is often usefully available for groceries, clothing, savings, vacations, and other discretionary things. A reduction in principal is also achieved. However, it often does not mean that such a benefit is achieved without a marked increase in monthly payments.
People who are behind in payments, have high debt balances, and can no longer afford their monthly payments, should consider negotiating with their lenders for a debt settlement. Before beginning the process, a person is put through a process of financial counseling, which is a step or when people learn about bankruptcy. Although this is unpleasant, it is sometimes necessary. In many cases, only a waiver of 20-70 percent of the debt owed is granted.
The drawback of debt settlement is that the person’s debt relief program will negatively affect their credit rating. This can be improved over time, but any significant reduction usually does not go unnoticed. It is important to research the company with which a person will enroll in a debt settlement program or any company that might promise to achieve ridiculous results. It is wise to check with the Better Business Bureau and various debt relief association websites.
When you find that you really do qualify for a debt settlement program, and you begin making regular payments, you will be turning financial accounts over to a company that specializes in reducing debt and will provide secure financial freedom to begin again.