What is Debt Settlement and How Does it Work?
Debt settlement, also referred to as debt negotiation, means that your debt is negotiated down to a reduced amount and your account is settled in full; paid to a zero balance.
Debt settlement is the process of negotiating with your creditors to settle your debts for less than what you owe, typically for about half of the current balance. This process is not an exact science and is best described as “good, old-fashioned haggling.”
Debt settlement usually only works with unsecured debts such as credit card debt, personal lines of credit or medical debts, but can also work on secured debts after repossession or foreclosure.
Historically, settlement amounts within 40-60% of your outstanding balance are realistic. For example, if your debt is settled for 40%, that means your $50,000.00 in total unsecured debt is settled for about $20,000. Some creditors may not accept settlement of less than 60%, while other creditors may settle as low as 10-25%.
Settling debt can help consumers save significant amounts of money and get out of debt very quickly, typically in 12-36 months or sooner if funds are available.
These incredible savings in time and money are especially significant when compared to paying the full balance plus interest over a long period of time:
$50,000.00 in credit card debt at 18% interest would take 502 months (42 YEARS) to pay off with minimum payments of $1,225.00, at a total cost of $124,428.96.Compare this to debt settlement, which would have the same person out of debt through a debt settlement program in just 24 months at payments of $1,200 and a total cost of about $28,800.
The same person might also choose a 36 month debt settlement program with even lower payments of $825 a month and a total cost $29,700.
Debt settlement is one of the most effective debt relief options available for consumers experiencing a financial hardship. It’s a great choice if you have more debt than you can afford to pay off and you’re falling behind, or just about to fall behind, on your monthly payments.
Getting out of debt as soon as possible is always best when you are paying interest, especially if you are being charged interest rates of 20-30% after falling behind on payments.
Why would you credit card company, commonly referred to as a “creditor”, choose to settle debts rather than continue to charge you interest and late fees month after month?
Well it’s really a matter of dollars and good sense…
Creditors know that if you get into a bad financial situation and you can’t make your monthly payments you may decide to declare bankruptcy, and in this case they may get nothing. Therefore, given your hardship, rather than risk getting nothing, the creditor is usually very willing to settle for a lower amount.
The most common alternative to settling debts with consumers for a creditor is to sell the debt to a debt collector. In 2006 the average amount paid for “bad debt” in America was $0.034 on the dollar. THis means a $10,000 account is sold for an average of $340. So you can see why a creditor would glady accept 50% instead of selling to a debt collector. You can also see why debt collector are willing to settle for half or less when you consider how little they pay to aquire your account.
Once you enroll in a debt settlement program, the first priority is to effectively minimize creditor’s phone calls. Your total unsecured debt amount is reduced while providing just one low monthly program payment. Your monthly program payment amount is often as much as half your current combined monthly payments to the same creditors.
What’s the Bottom Line on Debt Settlement?
Debt settlement is the fastest way to get out of debt for the least amount of money while avoiding bankruptcy.
