Debt settlement is a method used to negotiate and reduce debts. It is generally considered a better alternative than bankruptcy but still it is a forceful method.
Debt settlement is generally done in cases where the borrower is facing extreme financial difficulties, where bankruptcy is very likely. A debt settlement firm helps the borrower negotiate with creditors to settle the debt for a lower amount than the borrowed amount and pays a lump sum amount to settle the debt.
The lenders agree to settle for a lower amount because if the borrower is unable to pay the loan, and declares bankruptcy, then the lender is at a greater risk of losing a larger amount of debt owned. However if the borrower does not show financial difficulties the lender might refuse to settle the debt in this manner and even take legal action against the borrower.
Whether a borrower decides to settle dues directly with lenders or through professional debt settlement firms they will have to set aside a certain sum of money to build up a settlement fund. The settlement company will require a limited power of attorney to act on behalf of the borrower and negotiate with the lenders.
After collecting a certain amount of money the borrower will negotiate with the lender to agree with the reduced payment amount. Once the lender agrees to the settlement amount the payment is arranged for making a full and final settlement.
Monthly payments can be made into the settlement fund to pay off the debt amount agreed upon. The lender then sends a letter to the borrower and the credit bureaus stating that the amount has been settled for less than the agreed amount.
There are a few disadvantages. You must consider your credit report and tax consequences of debt settlement.
