Debt settlement is the settlement discussed with a debtor’s creditor. This usually occurs with creditors that do not have the benefit of any form of security interests in the assets of the debtor.
During debt settlement, the creditor most times decides to forgive large part of the debt most likely around 50 percent of the debt. Finalized settlements are usually put into writing to seal the agreement.
In most cases, the debtor makes one large sum of payment at once to persuade the creditor to forgive the remaining debt owed. Other settlements are paid over a time frame. Whether the debtor pays a large sum at once or pays over a time frame, the debtor still has to act in accordance with what’s written on the settlement or else an outstanding debt will show on the former debtor’s credit report.
Settlement of debt has been occurring for centuries and is not a new scheme used in economics or the business world. Debt settlement is usually initiated when the debtor is unable to pay the full amount owed to the creditor. In such situations, an agreement is reached and a compromise is made for the debtor to pay less amount of money in exchange for forgoing the debt.
Process of settlement
The process basically involves the negotiating with creditors to lower the total debt owed in exchange for a lumpsum amount. A settlement is termed as successful when the creditor agrees to forgive a part of the debtor’s debt.
It is important to note that just unsecured debts can be settled. Settlement does not work for secured debts (debts secured with assets of the debtor).
Although it does not work for all unsecured debts, it can be used for debts such as credit card debts, medical bills but can not be used for mortgages or student loans. It benefits both the debtor and the creditor. The debtor is able to avoid the stigma of lack of payment and escape court intrusion; they also only need to pay part of the debt which will be a fraction of the original.
The creditor on the hand is able to get part of their credit without the debtor filing for bankruptcy. They receive trust that they’ll be able to get part of amount owed.
Debt settlement often works with debts involving a debt buyer. There are certain individuals that purchase debts from creditors. Such debts purchased from creditors are usually unsecured debts that the creditor has lost hope of retrieving. These buyers then buy the debt at a fraction of the debt sum from the creditor.
Once the debt purchase is settled, the buyer can then track down the debtor and propose a debt settlement. This works in the favor of the buyer and the debtor as the buyer obtained the debt at a fraction of total sum and the debtor doesn’t have to pay the entire sum owed.
John Abio is a business man who offers business advice to businesses and provides lots of business information on his blog.