Debt Consolidation NEWS

What is Debt Settlement?

Published by admin on December 3, 2009

Debt settlement is when you owe a large sum to some creditors and you negotiate with them for a down payment that would settle the debt.
For instance, if you owe $100,000 of unsecured loans and you are in danger of reaching bankruptcy, the lender might consider allowing you to settle the debt with them for a much smaller sum, like $35,000, if paid immediately.

It’s best that you don’t try debt settlement unless you’re on the brink of bankruptcy or if you have too much debt for you to pay, because otherwise, it would ruin your credit score for up to six years. This would lead to much higher interest rates in the future and even being turned down for some kinds of loans.

For a fee, there are some debt settlement companies that are going to negotiate for you a deal with your creditors.

Typically, such companies would withold your payments for several months and put them in a bank account. The creditors would become more impatient and they might feel that you would not be able to pay your debts and that you could declare bankruptcy, which means that they could get nothing at all.

This is the moment when the debt settlement company tries to negotiate with them, by giving a certain lump sum in one go, with the rest of the loans being forgiven. The percentage by which the debt is reduced depends on your overall financial status, but it can be as high 40-60%.

Nevertheless, there are some risks involved, such as being sued by a creditor when the negotiators contact them. This is an expensive approach for the creditors and it does not occur often.

Another thing that you need to remember is that you could also owe taxes on the difference between the amount you got from the creditors and the amount you give back, as this is considered an income.

The account status for a settled debt has the “Settled” status and it will have a negative effect over future loans. To prevent this from happening, it is possible to negotiate with the creditors to mark debt “Paid in full” after you pay the amount for the settlement.

A thing you should remember before signing up with a debt settlement company is to ask about the fees they charge. Some companies have quite large fees and it’s best to check this beforehand.

Readers Rating: