Typical Debt Settlement

Debtors with mounting bills and no way to pay them off on time face difficult decisions and few good options. Apart from bankruptcy, debt settlement is one potential path to getting out of debt, but it is fraught with potential hazards. No two debt settlements are identical, but they typically include the same steps.

Negotiations

In any debt settlement, the debtor first contacts the creditor and offers a settlement. Typically, the debtor proposes that she pay a portion of the remaining debt in a lump-sum payment. In exchange for this large payment, the debtor agrees to forgive the remainder of the money owed. Creditors may or may not be willing to enter into settlement agreement, but, in general, they would prefer to settle debts rather than face trying to collect from you after you file for bankruptcy, according to debt writer Gerri Detweller as reported by Aleksandra Todorova in a March 2011 aticle on the SmartMoney website.

Settlement

A settlement is a negotiated payment to which both parties agree, and it may come after several offers or counteroffers.Typical debt settlement terms require the debtor to repay the creditor a percentage of the debt, often between 20 and 75 percent of the owed money, according to the SmartMoney website. For example, if you owe $10,000 to a credit card company, you might be able to settle for between $2,000 and $7,500, meaning you pay the settlement amount and the credit card company forgives the rest.

Settlement Plans

Some consumers, especially those with multiple debts, use a debt settlement company or service to settle their debts for them. These companies negotiate on the debtor's behalf and obtain settlements for them. Fees for these services vary. Some companies, for example, collect their fees as a percentage of the total debt they negotiate on behalf of the debtor, while others charge a percentage of the amount saved.

Settlement Companies

Settlement companies vary widely, and many are untrustworthy. If you decide to use a debt settlement company, you should research it and its history beforehand. Also, companies that charge customers upfront fees to begin negotiations do not generally return your money if you later decide to back out of a settlement and declare bankruptcy. If, for example, you hire a company and change your mind about settlement, you may lose the fees you paid to the company on top of the debt you owe. However, as of October 2010, for-profit companies that offer debt relief services over the telephone cannot charge a fee before they settle or reduce a customer's credit card or other unsecured debt, according to the Federal Trade Commission.