Debt Negotiation – What is a Debt Settlement and When Does it Make Financial Sense?

You might have heard about debt settlement from a friend or read about it online. It has become a very popular option in 2010 and it is much more used than bankruptcy; which is a good thing. The government is trying to discourage consumers from filing for bankruptcy and so it gives them alternatives like a settlement that promise to help consumers pay back their debt and not file for bankruptcy.

Debt settlement is also known as debt negotiation and this is how it mainly works, by negotiation. It is a process in which you talk with the creditor and ask for a lower amount of debt to pay back. This involves a series of offers and contra offers until you reach an agreement and can be done with debt settlement letters. You can find samples of such letters online and it is good to use them rather than just talking. At least this way you have a signed legal document.

If you don’t think you can do it alone, you can always hire a settlement company to do the negotiations for you. They provide professional help and they can get you a reduction of 40-60%; this is quite a lot and it does make any debt much more affordable. Most creditors will ask for the rest in a lump sum and you will have to save some money in a separate account. The first monthly deposits will go the settlement company to cover their fees and only then will you start saving money for the creditor. You should have this amount in 2 or 3 years, depending on your financial possibilities.

A settlement makes sense if you have unsecured debt of more than 10.000 dollars and you can’t afford to pay it back. It is much better than bankruptcy and should involve less stress if you do it properly. You also have to be willing to pay half of your debt back and not just want it all gone. Debt settlement doesn’t affect your credit score in a bad way so you don’t have to worry about that.

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