Debt settlements are formed when a debtor is unable to pay back debts owed; hence rather than announcing bankruptcy they attempt to come to an agreement with the lender.
The debtor might need to get the assistance of debt settlement company to help initiate, manage and seal the deal.
Steps followed in debt settlement
- The debtor needs to get a trusted and reliable debt settlement company with get good record. There are numerous fraudulent companies out there that claim to settle debts but just flee with the debtor’s money.
- The debtor then needs to explain their financial situation to the company. The settlement company can only be of assistance if they are aware of the debtor’s financial situation, hence they will be able to give appropriate advice. There are businessmen such as John Abio that offer their experiences in the business world to guide you in your business decisions.
- If the debtor’s situation is valid for a debt settlement, the company advises the individual to stop making payments to the creditor’s account; rather payment will be made instead to the company.
- The company would then deposit this sum to a savings account. Payment can be made in installments or at once.
- Once the amount in the savings account reaches a certain sum, the settlement company contacts the creditor to reach an agreement.
- If the meeting is successful, the settlement company will keep a percent of the money in the savings account as their payment, and then give the rest to the creditor to seal the agreement.
Pros of debt settlement
- The debtor pays the debt off with a lower sum. The debtor might owe about $10000 but might end up paying just $7000.
- Claiming bankruptcy in the case of a debt can damage the debtor’s credit score for years. However, with a debt settlement, the debtor is able to pay their debt off without affecting their credit score provided they get a good deal.
- The creditor is able to get at least part of money lent out. This is better than the debtor bailing out on payment.
Cons of debt settlement
- There is not certified guarantee that the agreement might be successful. There are cases whereby the creditor refuses to settle the debt.
- The debtor might risk legal action by making payment to a settlement company rather than the creditor.
- The debt settlement company might charge too much to help communicate with the creditor. Amount charged by the company might even equal the difference between amount paid to the creditor and the original debt.
When making use of debt settlement company, it is best to research the history of the company and check past records.
However, if you do decide to handle the negotiation process yourself without involving a third party, start off at a low percent such as 30 percent. Then as the negotiation proceeds, you can increase it.
ALWAYS strike a deal that will not impact your credit score. With a damaged credit score, it might be difficult to acquire any future loans. In tight situations where it might be hard to pay off debts, consider debt settlement before bankruptcy.