Debt Settlement or Reduction – Know the Basics

Improper credit control from major financial institutions in the United States and a series of fiscal miscalculations left us with the worst financial crisis in the country since the Great Depression of 1931. Many people suffered in the crossfire resulting from the crisis. If you are one of the many who are now in debt that seems insurmountable, don’t lose heart.


Debt settlement or reduction works for many individuals and you could salvage yourself from total bankruptcy. Here’s a simple piece that will equip you with the basic knowhow of debt settlement or reduction:

What is it?

Debt settlement or reduction may refer to one of the many ways in which creditors (lending agencies such as banks) agree to revise the payment method or amount owed by you to them. The creditor can agree to “write-off” or “charge-off” a part of the debt to reduce the strain you are in. This means that instead of repaying the entire credit, you could pay a part of it that is mutually agreed upon and the lender will honor that payment as a full recovery of the loan.

Debt settlement or reduction may also come in terms of making the monthly installments more flexible. The creditor may extend the time over which you are to repay the loan. This can mean smaller monthly payments and a more manageable financial plan.

Why does it work?

It may baffle you as to why a creditor would settle for less than the full sum you owe. The reasons are purely financial. Lenders know that it is better to recover at least part of the credit than to lose it all in case the debtor files for bankruptcy. Lenders therefore try to be as accommodative as possible in making the repayment easy for you. Your personal bankruptcy makes bad business sense for them too.

How does it work?

Debt settlement or reduction can be negotiated with the creditors using many options. You could use one of the many debt settlement programs available in the market. These programs guide you through the steps involved in debt settlement. Some of these are DIY programs online, and some of them are sold as services that you purchase. Either way, it is advised that you exercise acute caution.

You could also hire a lawyer to read into the fine print for you and ensure that you aren’t getting a rough deal when dealing with creditors who are definitely more experienced at this than you are. If you are consulting a debt settlement company which can negotiate with your creditor, avoid going for companies that demand a fat service fee in before breaking a deal. There again, a lawyer would help.

Who does it work for?

Debt settlement or reduction may not work for everyone. If your debt is secured, i.e., if it is attached to a tangible asset such as a car or a home, there are very slim chances that you will be able to negotiate a debt settlement or reduction with your lending agency. Creditors prefer to confiscate the security in the event of nonpayment rather than negotiate a reduced sum.

If however, your debt is unsecured – like credit card bills, healthcare premiums, etc. – your chances at getting a debt settlement or reduction increase substantially. Either way, it is a good idea to test your eligibility before attempting a debt settlement or reduction. It can be frustrating to try and get a settlement and end up with nothing.

When does it work?

Let’s face it. The lenders want all of their money. They don’t really care if you are stretched as long as you aren’t facing imminent bankruptcy. So if you can make your payments by cutting corners and still stay afloat, the creditors will not consider a debt settlement or reduction. It is only when your debt borders delinquency that such an action is seen as an alternative.

If you get the ball rolling, be sure to follow through. Most debt settlement or reduction has consequences that appear in your credit history and your tax records. However, these blemishes are not permanent. You can improve your credit history by being prudent and maintaining good financial health. Most importantly, end the debt (with all the taxation and paperwork involved) once and for all. You don’t want it to rear its head again in the form of outstanding fees or tax evasion charges!

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