Debt Settlement – Avoiding financial fiasco

Debt settlement also known as debt negotiation, is referred to as the process in, which part of the unpaid debt amount is forgiven or eliminated. The concept of debt settlement gained prominence during the second half of 1980s and during the first half of 1990s in the United States of America. This occurred due to a bank deregulation, which made consumer lending norms flexible during the same period and, which was followed by a recession in the economy.

When should a borrower opt for debt settlement?
Under the following circumstances, an individual should think about a debt settlement program-

• If the creditor decides to sue the debtor.
• If the debtor has defaulted payments for a few months
• If the debt account has been charged off

What is the creditor’s interest in agreeing for debt settlement?
• There are several lending institutions who agree to debt settlement programs with the hope of getting back at least part of the unpaid amount, which would have otherwise been lost if the borrower filed for bankruptcy.

• There is one more benefit of a debt settlement program. It has been observed that in majority of the cases, the creditors could extract more money than they had actually expected. This is usually done through various methods adopted by the collection agencies.

• The creditor becomes aware that the borrower is at least making an effort to pay back the amount.

The debt settlement process:
In this process, the borrower stops making the monthly payments and tries to save that amount. When he has saved about half of the total unpaid amount, the borrower tries to negotiate with the creditor, thereby opting for debt settlement. Debt settlement process is also known as Debt Arbitration and can serve as an alternative to filing for bankruptcy. If one hires the services of a debt settlement firm, the firm proceeds in the following manner:

• The firm creates a trust account for the debtor.
• A particular amount is saved every month in that account depending on the individual’s disposable income.
• When it reaches a considerable amount, negotiation begins with the creditors.
How to choose a good debt settlement firm?
There are many borrowers who try to manage their debt all by themselves. However, every one may not succeed. A debt settlement firm may help out borrowers to a great extent. While selecting a firm, the following aspects should be kept in mind.

• The debtor should find out if the debt settlement agency reports to the three well known reporting agencies or not.
• The service cost of reaching a debt settlement.
• One should also find out if debt Settlement Company gives a service guarantee.
• The company should be equipped with an alternative program in case the debt settlement program fails. This has to be checked also.
• Debt problems (especially debt settlement) are best understood by professionals who are IAPDA certified. The debt settlement firm should be employing certified professionals, who are certified by International Association of Professional Debt Arbitrators.
• The debt settlement firm should have membership of BBB or Better Business Bureau.

What are the advantages of debt settlement?
Debt settlement has many advantages. Some of them have been mentioned below. They are:

• Avoid harassment and calls from creditors
• The debtor is assigned more time for payment
• One is allowed to shell out less money
• The debtor becomes debt free in one payment

In addition to the above, a debt settlement allows one to swim out of debt and become debt free.