What Is Debt Mediation?

Consumer debt stands at a collective $2.4 billion as of October 2010, according to the U.S. Federal Reserve. This represents an increase of 1.7 percent from the year previous. Many Americans find themselves over their heads in debt. Fortunately, you have options other than filing for personal bankruptcy. Debt mediation is one way to get yourself back on the road to financial solvency.

What is Debt Mediation?

Debt mediation allows you to sit down with your creditors and come to a mutually beneficial agreement about how to pay off your debts. This is done either individually or with a debt mediation service. The latter can help you get a better settlement, but it isn't done for free. Much of what you save can be lost in charges levied by the debt mediation company that helps you.

How Does It Work?

Debt mediation works by lowering your interest payments to the concession rate (lowest rate offered by the credit card company) and coming to an agreement on what level to reduce principal to. You also consolidate your debts into one monthly payment, paid into a trust account, that the debt mediation company then pays out to your creditors at the agreed upon rates. This payment is pegged to a time frame, usually between two and three years. This allows you to know when you will be out of debt and to tailor your monthly payment to that calendar.

How Is My Credit Rating Affected?

One downside of debt mediation is that your credit rating will initially take a turn for the negative. You have shown future creditors that you have borrowed more than you can pay back. Still, once you start making regular payments, you will see your credit rating improve. Your credit rating will see significant improvement once you have paid off your debts. Debt mediation allows you to turn negative spots on your credit into positives.

What Do I Look For in a Service?

With many scams out there, it's important to know what to look for in a debt mediation service. The most important factor is the service's history -- What kind of settlements has it gotten for other clients? You can also look at its reputation in the debt mediation community, including professional organizations such as the American Association of Debt Management Organizations and the National Foundation for Credit Counseling. You can also see what the Better Business Bureau has to say about your potential mediator.