What is Debt Settlement?

Keeping up with the monthly payments related to credit card debts can become increasingly difficult in these times of financial hardship. An individual may completely be unable to clear up their debts and eventually file for bankruptcy. This of course leaves the creditors at a loss since they may not be able to recover the money owed to them from the debt or may recover a considerably lower amount than they were owed. Debt settlement entails negotiations between debtors, who are unable to keep up with payments to settle the debt at a fraction of what they may owe.

Debt settlement negotiations are meant to strike a deal between the debtor and creditors for lower payment rates or to reduce a percentage of the amount owed.  It typically works by creditors agreeing to acknowledge settlement of the payment by extending a onetime payment amount to the creditor. The settlement amount usually adds up to about twenty to seventy-five percent of the balance that is actually owed. When an agreement to cut the debt has been agreed too, this enables the debtor to comfortably meet the payment without having to resort to the declaration of bankruptcy. The creditors benefit from treating the balance as a new payment which in the long run makes them more money than if the individual had forfeited payment by declaring bankruptcy.

Debts settlement programs are made in relation to unsecured loans; loans which were acquired without collateral security. Since these loans are taken without collateral, they pose a high risk to the creditor in the event that the debtor cannot meet the payments. Secured loans on the other hand are a little bit risk free since the creditor can easily seize the collateral, which are usually assets or other property, to recover back the loan.

Generally, that is why unsecured loans carry higher interest rates as opposed to secured loans. The types of debts you can include are credit cards debts, unsecured loans, collection bills and even hospital bills. Mortgages, auto financing and student loans are not considered valid debts by the debt settlement programs.

This article was first published in What is Debt Settlement?