Many consumers have high levels of unsecured debt, such as credit cards. Credit cards often bear high interest rates, so unpaid debts rise quickly as interest accrues. You risk a declining or bad credit score. To resolve debt, you may employ debt settlement or debt consideration. Explore all options for debt resolution before deciding upon a course of action.
Debt Settlement
Debt settlement allows you and the lender to settle outstanding debt for a portion of the outstanding amount. For example, you may owe $3,000 on a credit card. You may offer the credit card company $1,500 to settle the debt now. Put the settlement offer in writing and pay the amount to the creditor after receipt of written acceptance of your settlement offer.
The lender typically understands why a proposal of debt settlement makes mutual financial sense. If you're financially overburdened, you may seek relief under Chapter 7 bankruptcy for discharge of unsecured debts. Consumer bankruptcy may prevent the credit card company from asset recovery.
Settlement Pros and Cons
The advantages of debt settlement include immediate resolution of outstanding debt, usually at about 50 to 80 percent of the outstanding balance. Your credit report shows the debts as paid, paid in settlement or paid in full. Settling debts saves accruing interest charges, and results in an eventual rise in credit score. On a short-term basis, settling debts may create a decline in credit score. Settled debts may incur tax liability: if your creditor accepts a $1,500 payment to settle a $3,000 account, you may owe taxes on the difference. Discuss any debt settlement with your financial advisor prior to execution.
Debt Consideration
Debt consideration may result in more lenient debt repayment terms. Other debt relief, such as Chapter 7 bankruptcy or wage-earner's bankruptcy under Chapter 13, is avoided. For example, you owe $3,000 to a credit card. You offer to repay the debt after obtaining a lower interest rate and an extended payment schedule. If the credit card currently charges a 21 annual percentage rate (APR), you may request consideration at a lower rate.
Legal Elements
Consideration must involve a legal bargain. The bargain must include accord or accord and satisfaction. You may propose a new repayment schedule, lower interest rate or reduced principal amount to the lender in writing. The lender must accept the proposal in writing.
The agreement, or claim, involves new terms and conditions. Consideration of the new terms must occur before the debt amount is disputed. The new terms must be executed, or in accord, for the parties to have satisfaction. Unliquidated debt, prior to a dispute, may be restructured by consideration of the parties. Disputed debt cannot be resolved under these terms.
Pros and Cons of Consideration
Debt consideration relieves you from original repayment terms and allows your repayment of the debt under new terms. After the lender agrees to your proposal, abide by the new terms. Your credit report may indicate a slow pay or other notation. After paying off the debt under new terms, your credit report reflects paid in full or paid as agreed.
Debt consideration helps when you're without sufficient capital to offer a debt settlement. The benefits include avoiding bankruptcy as your lender receives partial or full asset recovery.
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