Debt settlement is the process of negotiating with your creditors so that you are able to pay off a certain percentage of the debt amount that you owe. A debt settlement company will use different types of strategies to negotiate with your creditors so that you get the best outcome. You’ll want to hire a debt settlement company that has arbitrators who are experienced and licensed so that they can negotiate a deal for you with your creditors. You can expect to lower the balances on the debt that you owe by anywhere from 40% to 60%.

It is basically a process to settle your debts with creditors. The process usually involves a third party who mediates between you and the creditor to decide upon a feasible debt settlement plan in which you have to pay a reduced debt. Depending upon the expertise of the third party and the understanding reached between you and the creditor, the debt may be reduced by as much as 25 to 50% of the original amount.

Yet, before opting for a debt settlement plan, you need to weigh your options carefully. Go in for this plan only if you are sure that you have no other option to pay your debt otherwise. Also, consider filing for bankruptcy or trying to sort out the matters yourself. Once you have decided that debt settlement is your best possible option, you need to understand how the settlement plan works.

How does the debt settlement process work?

The answer is simple: creditors know that if you end up declaring bankruptcy that they may not have any chance at all of seeing any of the debt that you owe repaid to them. Studies show that approximately 25% to 30% of all bankruptcies that are filed each year are “current debt”. Many people obtain more credit to pay off another creditor. After a period of time these people run out of credit to pay off their existing debt. And this is when many bankruptcies are filed.

When people file a bankruptcy claim creditors don’t get back any of the money that is owed to them. This means that a creditor is better off negotiating with the person who owes them money so that they can regain even a small portion of the total amount of the debt Debt settlement companies will work with you and your creditors so that you can pay the minimum amount of money back to your creditor.

As state above, a third party or a settlement agency mediates between you and your creditors. This agency then collects a certain decided upon amount from you on a monthly basis and puts it into an escrow account where the money accumulates over a period of time. After a decent amount is reached, the agency then contacts the creditor, negotiates the debt and begins to pay off. The cycle is repeated till the debt is paid off.

The negotiating agency, apart from charging fees for the services rendered, may also charge a monthly maintenance fee. Before zeroing on the agency, make sure that the fee is not higher than what they have decided to charge every month. This is because while accumulating money to pay off your debts, you are also accumulating late fees and interest charges as well.

A debt settlement company will allow a certain amount of time for the debt to be settled. A common time period is 36 months and during this time the creditor needs to agree to on a total amount to negotiate on. Before you can use debt settlement to settle up your debts, you’ll need to qualify for the program. In order to see if you qualify or not, many debt settlement companies will require that you talk to a consultant about your personal debt. Together you’ll set up a financial program that will meet your needs. You’ll be able to determine just how much money you need to put aside every month so that you can start to pay off your debt.

By Jon Thomas & Marcus Peterson

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