Debt Settlement – All That You Need To Know

Two people shaking hands after debt settlement.
Photo by Cytonn Photography on Unsplash

Ran out of options to clear away your debts? Try as you may but all your efforts have failed to keep the debts from piling on.


Consider debt settlement when other corrective measures have failed to keep your rising debts under check. Debt settlement involves talking terms with your creditors and negotiating on the debts you owe them.

So, how does debt settlement work?

Debt settlement essentially is an act of negotiation between the creditor and the debtor. This is generally agreed upon when a debtor, by virtue of his or her financial situation, is unable to dish out regular payments to his or her creditors. Under such circumstances, the debtors themselves (or through professional debt management companies) negotiate with their creditors and reconcile on reduced and mutually agreed monthly payments.

The debtor thus has debts waived off to some extent in lieu of regular monthly payments. It may also happen that the creditors (e.g. credit card companies) may lower, or in some cases, completely waive off the interest charges on the debts incurred. This primarily depends on your track record with the creditor with regards to your payments and your overall credit history.

How to get started with a debt settlement program?

To get going with debt settlement, you may hire a professional arbitrator (a lawyer), or go to a credible debt settlement company, who can take the initiative on your behalf. When a debt management company is involved, all your payments to the creditors are routed through them.

You may also take the reins of debt settlement into your own hands, especially when it appears that the cost of professional help is thinning down an already constrained budget. This should be done only after you have educated yourself and are familiar with the nitty-gritty of debt settlement, especially the laws associated with debts.

Internet, finance sites and magazines, and blogs are replete with information about debt settlements. With the help of the pointers and tools given in these helpful resources, you can educate yourself and be your own guide to debt settlement.

What are the pros of debt settlement?

As debt settlement happens with the involvement of the creditors, the amount you pay will be much reduced as compared to what you actually owe. This implies that you will be paying off a considerably lower amount to your creditors.

Since the outstanding debts are considerably reduced, you are able repay the outstanding in a shorter period of time. Debt settlement generally reduces your payback time-period.

Bankruptcy has severe and long-lasting impacts on your credit scores. It is a virtual impediment to any of your future financial moves. Debt settlement acts as a savior from bankruptcy.

Cons of debt settlement

Debt settlement may be of help to wipe off your debts but does little good to your credit scores. If debt settlement is mentioned in your credit report, it invariably lowers your credit score (though not as much as bankruptcy). This makes it difficult to obtain credits, loans etc.

Debt settlement only applies to unsecured debts. This implies that you may settle your credit card debts but mortgages can’t be settled.

Most importantly, in case the debt settlement company delays your payments to the creditors, you stand a chance of being sued.

What are the points to keep in mind when going for debt settlement?

It is quite imperative that you were running a bad credit report before you opted for debt settlement. Here is a common misconception that needs to be done away with as you go ahead with debt settlement. Contrary to the claims that quite a few companies make, debt settlement (or debt settlement companies) can’t clear away a bad credit history.

Debt settlement gives you some extra breathing space on your debts by somewhat lowering your debts, interest amount etc. But such a settlement cannot wipe away any discredits (or bad credits) on your credit reports. Do not fall for such gimmicks. So, only if the option is between the devil of bankruptcy and the blue sea of debt settlement, choose the latter. In all other cases, try paying off your credits in a more systematic way.

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