Within the current economic climate, many Americans find themselves crushed under the ever-larger pressure of unpaid debt. Whether we’re talking about credit card debt, unpaid medical bills, personal or student loans, indebtedness is a sad reality of the economic downturn, as well as a constant source of stress and worry for consumers whose access to credit has been significantly restricted. According to the US Federal Reserve, revolving debt in the States (most of which comes from outstanding credit card balances) hit a staggering USD 943 billion at the end of 2008. The question is – what can consumers do in order to achieve at least some level of debt relief? There are a number of options at their disposal, one of which is the so-called debt settlement, also referred to as debt negotiation or else debt arbitration.
Debt settlement is a complex topic, and before embarking on a more detailed analysis of what it entails and how it can help consumers, it is important to get acquainted with a few basic premises. First of all, what is debt settlement? Basically, debt settlement is a debt relief strategy that entails a creditor reaching an agreement with a debtor and accepting to be paid a reduced balance (in other words, an amount lower than the rightfully owed sum) that will be considered as payment in full for the initial debt. This means that in exchange for a lower one-time lump payment, the creditor will discharge the remainder of the debt and report to the credit bureaus that the debt has been settled. An indebted borrower can also negotiate to have his overall debt balance lowered in exchange for regular monthly payments rather than a one-time larger payment. Usually, once a debt settlement agreement has been reached between a consumer and a creditor, the latter will settle for anything between 25% and 75% of the original amount owed.
Another very important thing is that there are two basic types of debt – secured and unsecured. Secured debt includes all loans that were backed by collaterals such as the borrower’s home or car (auto financing and mortgages). Such debt cannot be settled, as by definition the borrower has agreed to have his car or house taken away if he cannot repay the loan. In such cases, no settlement is possible – the creditor will simply repossess the debtor’s car or house, and liquidate it to cover the incurred damages. Unsecured debt includes medical bills, student loans, credit cards, personal loans and department store cards. Out of these, only credit card debts can be settled. Yet another very important aspect consumers need to remember at all times is that creditors (credit card companies, banks, etc.) would prefer to reach some form of debt settlement and get at least some of their money back rather than sue the debtor (this can still happen, however it entails very high costs for the lender and is usually a channel pursued on few occasions) or else risk the debtor filing for bankruptcy and having his debts discharged.
There are several channels for individuals interest in credit card debt settlement deals. One way to do it is contact a debt settlement company, which will handle the matter for you in exchange for a (rather hefty) fee. A great deal of controversy surrounds debt settlement companies, which have predictably mushroomed as a result of the credit crunch and whose claims have become increasingly alluring – and outrageous. Essentially, the main task of any legitimate debt settlement company is to assist consumers in negotiating a reduced balance for their outstanding loans with their creditors. To do this, a debt settlement company may enroll their customers in a debt settlement program which involves debtors accumulating savings for a fixed interval, then paying off their debt with one lump-sum payment. This may sound like the right approach – however, one thing prospective customers need to understand is that debt settlement companies charge a lot for their services, and that there is no typical payment scheme or model that is valid with all debt settlement companies. Some such companies charge a percentage of the total debt, that consumers must pay before they can start accumulating savings. Others companies charge a percentage of the debt savings or else impose a flat monthly fee that is charge for the duration of the entire debt settlement program.
The debt settlement
To avoid accumulating even more debt, some consumers chose to arrange their own debt settlements with lenders. If you find yourself in such a position, one important thing to remember is that you can settle your debts either directly with the original creditor (the bank or credit card company), or else with a collection agency, which has taken over your debt from the original creditor. Remember this: creditors – be they banks, credit card companies or collection agencies – don’t like to advertise debt settlement, for obvious reasons: they don’t like the prospect of retrieving a smaller percentage of the money they are owed. However, as the economic crisis worsens, an increasing number of credit card companies are willing to accept as little as 50% of the balance they are owed as payment in full. In the end, less money is better than no money at all, which is the case when a consumer files for bankruptcy and their credit card debt is discharged.
Usually, if a consumer is less than 150 days late on payments, then his account is still with the original creditor and hasn’t yet been passed to a debt collection agency. It is well to remember that as long as a consumer continues to make at least some payments of their outstanding debt, creditors will usually not accept to negotiate the possibility of settling for a lowered balance. As a rule, credit card debt settlement will only be considered as a viable alternative by credit card companies once a consumer is 60 to 90 days late on his payments and once all payments have stopped. Timing is very important; usually, the credit card company will only agree to receive a percentage of the total account balance if the payment is made in full – in other words, the original creditor will usually settle for nothing less than a lump sum payment of the settlement amount, and will not agree to a payment plan. Also, remember that creditors will also consult a debtor’s credit report in order to find out if the person in question is paying any of their other bills. If by any chance you are paying everyone else back except the one creditor which whom you are hoping to reach a debt settlement, this may be impossible. If a consumer’s debt has been taken over by a credit agency, debt settlement can also be reached, with the mention that debt settlement agencies will sometimes agree to accept payments according to a payment plan. Remember that a debt collection agency has acquired your debt at a fraction of the original price of the outstanding balance. In this case, they may be convinced to accept less than 50% of the original balance as payment in full.
The debt settlement
Consumers who find themselves in a position to require debt settlement are strongly encouraged to attempt to do this by themselves rather than via a debt settlement company. Sometimes, all it takes is a telephone call to the credit card company’s customer relations office to initiate negotiations. Many individuals have successfully negotiated a debt settlement by themselves, simply by imitating the strategies employed by professional debt settlement companies or debt negotiation companies. There are, of course, a number of negative consequences when it comes to debt settlement, the most significant one being that debt settlements will be featured on consumers’ credit reports, which will impact their credit scores. Also, whenever debts go unpaid for a lengthy time span, the possibility of a lawsuit – while small – still looms. Last but not least, individual creditors as a rule adopt an aggressive anti-negotiations stance, if only to intimidate consumers into paying their balances in full.
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