A debt settlement, also called credit settlement, debt negotiation or debt arbitration is a method that assists people in reducing their debts.
It implies a debt negotiation between a creditor and a debtor.
A debt settlement is not to be confused with another form of debt relief, the debt consolidation.
The latter procedure means that the debt consolidator will get monthly payments from the person concerned; he will take its fee and will give the rest of the money to the other creditors.
Thus, the banks will receive their monthly payments.
A debt settlement means that the client will make payments every month and the agency that offers the service will receive the fees from those payments.
The rest of the money is placed in a special purpose or trust account.
If they don't reconcile, the creditors and banks won't get their money.
For this purpose, the client is instructed by the agency to make no payment to the specific creditors.
Thus, the creditors will be frightened that they won't get their money back and they will be forced to reduce the debt.
A big risk about the debt negotiation is that the creditors could use the collection procedure to receive their money and they could even sue the client.
However, if a consumer will pay every month the minimum sum required by the creditor, the latter one will have no interest in negotiating the balance.
On the other hand, the client must keep in mind that if the payments stop, the ongoing interests and the late fees will contribute to the growth of the balance.
In order to use the debt settlement method, people can look for a debt settlement agency, they may hire a lawyer or, if they have the knowledge, they can even negotiate with the creditors by themselves.
No matter what solution they choose, if they make it properly, individuals can only take advantage from the debt negotiation.
When you choose to use the services of a debt settlement agency you must know that some companies might take fees from your bank account or they could charge very big fees at the beginning.
That's why it's best to look for a firm that takes its fees after the debt is paid off.
The most effective companies are the ones that take only 20% of the total sum.
Like every other method of debt relief, the debt settlement also has positive and negative aspects.
The most important benefit of the debt negotiation is that it will help you avoid the bankruptcy.
Thus you will resolve your financial problems and you'll still have your car or home intact.
Another edge is that you won't pay a big amount of bills.
You'll have only one payment each month to your particular settlement agency and you won't have to deal with numerous creditors.
Also, you'll avoid their harassment and collection procedures.
A settlement company can also help you get rid of the late fees that might appear on your credit card.
Last but not least, a debt settlement helps you avoid legal actions.
On the other hand, one of the most crucial negative aspects is that your credit score will drop, because you won't make your monthly payments to the creditors.
Also, you'll have to pay extra taxes for your forgiven debt.
Moreover, the "settled" status in your score will bring a negative impact for your credit report.
As you can see, a debt settlement is very effective and easy to use.
Besides lowering your balance it also helps you save money.
However, you must be very careful to choose the best company for you.