What is Debt Arbitration?

Debt arbitration is a third-party intervention that brings debtors and and creditors together in order to reach a debt settlement. Generally debt arbitrators represent debtors to settle unsecured debt. Debt arbitration can set a debt management or debt settlement plan. Debt arbitration is not the same as credit counseling.

Significance

Debtors should know that there is a distinction between debt arbitrators and credit counselors. Debt arbitrators represent only the debtor, whereas credit counselors work with debtors, but on behalf of creditors. Debt arbitrators negotiate debt with creditors. It is neither debt consolidation nor credit counseling. With the exception of New York State, debt arbitrators are not required to be certified. Debt arbitrators do regulate themselves.

Function

Debt arbitrators negotiate settlements with creditors in order to save credit scores and reduce debt load. When debt becomes unmanageable and credit scores are jeopardized, debtors can turn to debt arbitrators to negotiate manageable plans with creditors. Debt arbitrators comprehend the complexities of creditor issues.Factors that contribute to the growth of and need for debt arbitration include tougher standards for individual bankruptcy and a trillion dollar plus debt, much of which is credit card debt.

Types

Debt arbitration offers two types of services. Debtors can consider debt settlement or debt management. Debt management can improve credit ratings and reduce interest rates, but has drawbacks. Debt settlement plans offer debtors an opportunity to pay back a percentage of initial debt and smaller monthly payments than debt management plans. For debt settlement, debtors need higher income levels and may need to liquidate assets for stubborn creditors.

Features

A debt settlement program can vary in results. Debtors can pay between 40% and 60% of their pre-settlement debt load. Debtors can improve mildly affected credit scores. Debt management is debt consolidation. Debtors pay 100% of their debt, with reduced interest, but with added monthly service fees. Poor credit can be improved. A debt management: plan can take five or six years to complete. Debt settlement provides a more attractive two to three-year program.

Considerations

It is important to know that debt arbitration is a service that represents debtors. Credit counseling is service for debtors, but is performed by counselors who work for creditors. Debtors also must educate themselves about the objectives and methods by which different debt arbitration plans pursue debt resolution. Different debt plans require different levels of debt, income and effects on credit ratings.