1 3 How Debt Settlement Works

1.3 How Debt Settlement Works
Debt settlement can be handled in a variety of ways, including help from a third-party debt company, or a lawyer who specializes in debt resolution. You can also try to negotiate a settlement yourself, though this can be challenging if you have no experience doing so.

A debt settlement company or attorney typically contacts lenders or creditors on your behalf and works to negotiate a lower payoff amount for unsecured debt such as credit cards, Personal Loans, Medical Bills, and Collection accounts. This approach can’t be used for such things as mortgages or automobile loans, or anything that is a secured debt both of which can be foreclosed upon.

While the negotiations are taking place, you may be required to make regular deposits into an account that’s under your control but is administered by an independent third-party. This is not an unusual step in the process. The money will be used to pay back whatever amount is settled upon as part of your payoff agreement with creditors. The debt settlement company may also advise you to stop paying your creditors until a debt settlement agreement is reached.

“When there is a successful negotiation on an account, and a creditor has agreed to a lower amount to be paid, which is the settlement, the client needs to approve the settlement terms” say experts. “The payments then will be made to the creditor, per the terms. Sometimes, the settlements involve one lump-sum payment. Others may be structured settlements, which means a client pays the agreed-upon amount over time.”. Only then can the debt settlement company begin charging you fees for its services. A successful settlement is one that allows a client to walk away without having to pay their full debt amount. Keep in mind that there is no guarantee the company will be able to reach a debt settlement agreement for all your debts.

In several situations, debt relief may be the only course of action in order to avoid bankruptcy. If a massive debt load makes it difficult to service borrowings, for example, creditors may be amenable to restructuring the debt and providing relief rather than risk the borrower defaulting on its obligations and increasing overall credit risk. Refinancing a mortgage to a lower interest rate is one straightforward example of debt relief.

Another common form of debt relief is debt consolidation, which is not a reduction in the amount you owe, but rather a reduction in your payment towards what you owe. This is covered in Chapter 2.