Debt settlement is a negotiation that involves the forgiveness of debt owed in exchange for a fraction of original debt.
Different laws regulate the settlement of debt depending on jurisdiction.
Professional debt settlement
This involves a debt settlement company. The company receives the sum agreed at the settlement from the debtor. The company serves as an intermediary between the debtor and the creditor.
As the debtor makes the payment, a fraction of each payment made to the company is taken by the company as fees. In this setting, the debtor does not make any sort of payment to the creditor, every sum goes to company.
Advantages of professional debt settlement
Creditors have the right to sue debtors in order to recover debts but having a good debt settlement company can prevent the occurrence of this. Companies with good reputation for recovery of debt will handle all the interactions with the creditor (credit card company) and arrange update calls at regular intervals.
Disadvantages of professional debt settlement
Companies who work towards the settlement of debt take a percentage of the paid sum as their fee; hence the debtor has to pay the creditor and the debt settlement company as well.
However, this does not faze most people as the total amount eventually paid is not near the actual sum owed.
Settlement plans that are over 36 months have a lesser chance of being completed in comparison with plans of 36 months or lesser.
Sole debt settlement
This is when the debtor decides to initiate the debt settlement themselves rather than employing the services of a debt settlement company. In this situation, the credit card company does not give the debtor the option of payment plans instead the debtor is to pay a lump sum at a time.
Advantages of sole debt settlement
The debtor does not have to pay any extra fee to the debt settlement company as they handle the process themselves.
Disadvantages of sole debt settlement
Individuals who tend to do this settlement on their own risk getting sued by the creditor. In such situations, the debtor will have to pay the entire sum or settle for bankruptcy. Mostly, such debtors file for bankruptcy and have to deal with court mandated controls.
Objections to settlement of debts
- It damages the credit of the debtor. The evidence of settlement will show on credit report and will therefore lower associated FICO scores. However, if the debtor is able to obtain a paid in full letter from the creditor, evidence of settlement will not appear on the credit report.
- Not all debts are eligible for settlement negotiation. Secure debts are not on the table. A number of unsecured debts cannot be negotiated as well such as domestic judgements and tax liens.
- The creditor might file for a lawsuit if the debt is not paid. Employing a good debt settlement company might prevent this as the company negotiates with the creditor. The company can also provide legal expenses insurance for the debtor in cases of legal action.
John Abio provides enlightenment on settlement of debts on his blog.
