Debt Settlement – How To Settle Your Debts

What Is Debt Settlement?

Debt settlement is the same thing as debt negotiation and is also sometimes called “debt arbitration” or “credit settlement”. While debt negotiation refers to the activity of negotiating with creditors to get a reduced debt amount, debt settlement refers to the result of those negotiations. The reduced amount agreed upon is called the “settlement”, so any time one is planning a debt negotiation, the goal is to arrive at a debt settlement.

Debt Settlement = Debt Negotiation

Because debt settlement and debt negotiation are the same thing, they work the same way. They use the same process whereby a debtor saves money in a special purpose account. Some debt relief companies will attempt to distinguish between debt settlement and debt negotiation, but often that is just a scam designed to trick potential consumers into using their service; thus, beware of debt settlement companies that claim to be doing something different. As with debt negotiation, debt settlement needs to be approached with caution.

Is Debt Settlement Like Debt Consolidation?

No. Debt settlement and debt consolidation are very different and should never be confused. With debt consolidation, you make monthly payments on a new loan that is managed by your debt relief company who continues to pay back your creditors directly. Each time you pay, you are still paying down your debt, so the program is fairly risk free unless you’re using your home to secure the consolidation loan. And sometimes it’s more expensive than debt settlement.

Where Does the Money Go?

With debt settlement, your monthly payments do not go to your creditors, and for a reason. Instead, you stop paying back your creditors and start putting money aside. Rather than paying back your creditors directly, your lower monthly payment goes into a trust or special purpose account where it continues to accumulate over time. As it accumulates due to the payments made into it each month, your unpaid debt decreases in value. After a certain period of time, your debt can be negotiated and settled for a lesser amount.

How Is It that Debts Can Be Settled?

Because you stop paying back creditors when you use a debt settlement plan, they essentially write you off. They know  either they’re not going to get anything from you because you’ll potentially declare bankruptcy or they’ll have to settle for less. Since less is better than nothing, they are willing to negotiate and settle.

Funds Grow and Grow

In the meantime, as you accumulate a settlement payoff amount, creditors will sell your debts to others at a discount, which means your debts will begin to lose value. By the time you’re ready to negotiate for a settlement, perhaps two years later, so much time has passed that it’s much easier to get whomever owns your debt to agree to a lesser payoff.

What Are the Risks with Debt Settlement?

The main risk with debt settlement is creditors or collection agencies may decide to file suit against you in court. Before considering debt settlement, you should always consider that possibility as well as what might happen if your settlement is unsuccessful. Debt negotiation and debt settlement are considered risky, so always talk to a credit counseling agency before exploring these options.

Hold the Dough Until You Know

Additionally, never pay any money up front for a settlement service unless you know exactly what it is and how it works, and always make sure to research companies thoroughly before using them. Finally, be sure to ask about what your fees will be so you can determine in advance if the cost is really worth the value and risks of the program.

Head on over to Curadebt and get a free, no obligation Debt Negotiation Consultation.