Debt Settlement: What it is & How it Works

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Financial matters can take a toll on you if you do not establish the means to exercise proper control and management. According to, checking on your spending helps to avoid excessive debt. However, harsh economic times and other needs may push you to limits. In that case, you may end up borrowing more than you can pay. So, how do you come out of such a situation? Read on to find out…

When you find yourself in too much debt, consider several options to come out of it.  One of them is debt settlement. This is one of the cost-effective means to become debt-free if you execute the plan perfectly. Debt settlement services are for-profit companies that negotiate your debt to lower it. Therefore, you will pay a fee, which is a percentage of the debt upon successful settlement.

Understanding Debt Settlement

Debt settlement is an agreement between a debtor and a company negotiating the settlement of money owed to creditors. Upon this agreement, the debtor stops making payments to the creditors and instead pays to the settlement company. In that case, they keep the money in an escrow account inclusive of the chargeable fees.

The work of the debt settlement service is to negotiate for a lower payment amount of the total amount owed. Once they reach an agreement, the settlement company now pays the creditor. The objective is to help you pay a reduced lump sum payment at once. In addition, you will pay the settlement company a fee of 15% of the debt.

The Help of a Debt Settlement Company

Bad debts and late payments ruin your credit score rating. Therefore, you cannot afford to access credit going into the future. For that reason, you should make effort to come out of bad books and mend your credit score. When your debt is more than you can pay, it becomes a big challenge for you. However, you can choose to negotiate with your creditors for a reduced payment.

The negotiation between you and your creditors happens in what we call a debt settlement plan. It is a strategy to solve your debt crisis for the last time. Therefore, you stop paying your creditors as a debt settlement company negotiates on how much to pay off the remaining debt balance.

Facts about Debt Settlement

Your case must meet certain criteria before the application of a debt settlement strategy. Here is what you should know about debt settlement plans.

  • The creditor must agree to the plan before execution. No one is under any obligation to accept the debt settlement plan.
  • The plan applies to most unsecured debts and/or loans. Simply, it is any debt not attached to any property. This includes personal loans, credit card loans and medical bills among other things.

Secured loans do not qualify for this option. Therefore, you cannot use this plan for student loans, car or mortgage loans, tax debt or business debt.

  • Ensure that the debt is legible for settlement before signing any agreement for debt settlement. In addition, ensure you have a plan on how to get the money for settlement.
  • The plan is to reduce the amount owed. Sometimes, this can be by a whopping 50% of the total debt. This is a good arrangement to avoid bankruptcy if you choose to take it up.

Working with a debt settlement company is a go-between for you and your creditors. They can work with your creditors to ensure they accept something lower than what you would have paid. This is possible if your creditors agree to this plan.

Since you have not been able to pay the debt on your own, going through a legal service would help. It creates some confidence in your creditors about your willingness to pay what you owe. Therefore, there is a better chance of getting this offer than doing it on your own.

If you have not been able to pay your debt, a debt settlement plan is a perfect option for you. However, it has to be an unsecured debt. The work of a debt settlement company is to negotiate for a reduced repayment of the debt balance. That way, you will end up paying less at a fee charged by the debt settlement company.

Interesting Related Article: “How Can You Ensure Debt Settlement Even with a Bad Credit?