Debt Settlement

Debt settlement is an emerging industry that many consumers who are facing a financial hardship will turn to for help in becoming debt free. Unlike credit counseling, debt settlement is the process of debt negotiation, in which a lender and a borrower agree to settle the balance for a reduction of the principle amount owed.

For example, if a consumer owes $10,000 in unsecured credit card debt, they may be able to settle that balance for roughly 40-60% of what is owed. Of course, how much money people can save by settling their debts varies on who the lender is, how far past due the account is and whether or not the account has been placed with a third party collector or not. For people who are having difficulty managing their finances and feel they need an alternative to filing bankruptcy, debt settlement may be a suitable option.

There are some important things in regards to debt settlement that consumers must understand before attempting this approach with their creditors. For one, lenders will not settle a debt if the consumer is current on their monthly payments as they have no incentive to do so as long as they are making interest off of the account. As a result, settling your debts will have a negative impact on your credit score- the lender will report the account as past due until the balance has been resolved. Also, debt settlement companies cannot get all collection calls to cease, as many restrictions placed on collectors by the Fair Debt Collection Practices Act (FDCPA) only apply to third party debt collectors and not the original creditors. Furthermore, creditors reserve the right to pursue legal action to collect on a past due balance. So there is some risk involved, and debt settlement is certainly a more aggressive approach to becoming debt free than its' credit counseling counterpart.

Before enrolling with a debt settlement company, it is necessary that all consumers do their homework. A good way to check up on a company's reputation is through the Better Business Bureau (bbb.org). There, you can see what grade the BBB has given the company, how long they have been in business and how many complaints have been filed against the company.