Does Debt Resolution Work?

Debt resolution is an option for people who have excessive debts that they cannot repay, and who either cannot file for bankruptcy or do not want to. Debt resolution can consist of various types of financial action, all with the purpose of eventually eliminating debts. Performed properly, it can be effective.

Debt Consolidation

One type of debt resolution is debt consolidation. This requires the intervention of a third party, usually a company that specializes in making debt consolidation loans. This party will look at your debts owed, the applicable interest rates and your recurring income and make an offer in which it will pay off your outstanding debts in return for an agreement that you make regular payments to it. Such companies may or may not be profit-seeking institutions. The advantage to debt consolidation is that it allows you to bring your recurring debt payments down to a manageable level. The disadvantage is that the repayment plan usually stretches over a longer period of time, and the total amount you must pay in interest is usually higher.

Debt Settlement

Also called debt arbitration, debt settlement is a debt resolution method in which the debtor renegotiates his debt with his creditor. This negotiation may involve a third party intermediary such as a lawyer or debt settlement firm. In a debt settlement, the debtor offers the creditor a lump sum of money as payment for the debt that he owes. This lump sum is less than the total debt that the creditor claims, but as long as it at least covers a significant portion of the principal amount, the creditor will often accept this lump sum payment and list the debt as paid. Creditors accept such payments when they feel that the debtor will not be able to make the minimum payments in the future anyway.

Refinancing

Like debt settlement, refinancing can require negotiation between debtor and creditor. Unlike debt settlement, refinancing does not result in a lump sum payment to the creditor to pay off a debt. Rather, it results in a lowering of interest rates to make it possible for the debtor to continue making payments. Refinancing can be advantageous in situations in which the debtor can prove that his income is such that paying the current interest rate is impossible. While refinancing can mean bargaining with a credit for a lower interest rate, it can also mean convincing another creditor to buy your debt and give you lower interest rates than what you are currently paying. Unlike a debt consolidation loan, a refinancing loan usually covers one specific debt and requires the same number of payments at a lower interest rate.

Risks of Debt Resolution

Although many debt resolution firms provide crucial help for their clients, a number of them have proven to be scams. Disgruntled clients complain that such firms promise results, take payment and then do not deliver results, leaving their clients in a worse condition than they were previously. Before you pay for debt resolution services, research the specific company to make sure that they can deliver on their claims. Also consider attempting debt settlement or refinancing on your own.