How Debt Settlement Negotiation Works

Paying Off Debt with a Debt Settlement Program

Sep 15, 2009 Asa Ghaffar

Are you seeking a way to pay off debt as quickly as possible? Discover how debt settlement negotiation can help.

Debt settlement negotiation involves clearing debt. It involves writing off up to 50% of unsecured debt and making an affordable monthly repayment for a 12 to 36 month period. The length of the agreement will depend heavily upon how much is owed and the amount contributed each month.

Settling Credit Card Debt, Loans and Medical Bills

The majority of unsecured debt can be included in a debt settlement program. This includes credit cards, unsecured loans, business debt, repossession deficiencies and unpaid medical bills. It is not possible to include student debt, active car loans, alimony and maintenance payments as well as unpaid taxes.

How Debt Settlement Negotiation Works

It will be clear that the terms of existing credit agreements are not financially sustainable to the debtor. In order to proceed with the debt settlement negotiation process, the lender will need to be flexible in terms of both the rate of repayment and percentage of the debt that they will actually receive.

Following a budgetary analysis, a professional advisor will liaise with creditors to see if they are able or prepared to accept the new, revised terms. The creditor realises that the debtor has financial difficulties and that any money lent was done so on an unsecured basis.

It may appear a little strange that a creditor is prepared to accept less favorable repayment terms. However, if the debtor does not receive repayment, they will normally sell-on defaulted accounts to a collection agency for 20-30% of its value and write off the remainder against taxes.

Write-Off Debt

Although there could be a debt reduction of up to 50%, this will not take place until the final payment is made. It would be impractical for the creditor to do this in case the borrower fails to meet the terms of the new agreement.

Just as the creditor should not write off debt before the final payment, the debtor should avoid debt settlement programs where fees are front-loaded. Whilst paying a 15% fee is common practice, these should not be paid up-front. Only agree to make this payment from monthly contributions.

The reason this is so important is if personal circumstances change or it is decided that the wrong debt solution has been chosen. Front-loading could serve to leave the client in more debt than when they started out settling credit card debt.

The debt settlement negotiation process allows the creditor to receive some of the money owed on what was previously a delinquent account. Paying off debt via a debt settlement program could well be the best option for both parties. The last thing a creditor would want is for the customer to file for bankruptcy.

Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional before proceeding.

The copyright of the article How Debt Settlement Negotiation Works in Personal Budgeting/Finance is owned by Asa Ghaffar. Permission to republish How Debt Settlement Negotiation Works in print or online must be granted by the author in writing.