Debt settlement is one of the many debt relief procedures that enable a debt-laden consumer to take care of their bills in the soonest time possible. The process involves negotiations with a lender in order to pay for less than the original balance due. The lowered balance will be considered as a payment, or a “settlement,” in full. Debt settlement is also known as debt negotiation, debt arbitration, and debt reduction, and is an alternative to applying for credit consolidation. Debt settlement is also a means of veering away from the stigma and somewhat invasive approach of bankruptcy.

Debt settlement is an ideal option for individuals who still continue to earn a steady income, yet are having problems in terms of paying off their bills. Furthermore, it also allows a person who is far behind in their bills to pay as little as 30-60% of the total balance due. The time frame for paying off the debt varies. Some debt settlement agencies may require their customers to make a lump sum payment of the entire settlement amount; some, on the other hand, would agree to smaller, incremental, but regular payments for debtors who could not come up with the entire payment in full. In this case, it usually takes 24-48 months before the debt is settled in full.

Starting out

To qualify for debt settlement, a consumer needs to know that only their unsecured debts are qualified to be enrolled in the program. Unsecured debts do not require any real estate or other assets to serve as collateral for the loan. In this light, credit card debts, medical bills, and personal loans can be settled. Mortgage payments, overdue alimony or child support, and government-subsidized loans are not eligible for a settlement.

Upon hiring the services of a debt settlement firm, an individual needs to know that they will need to prepare a certain amount that serves as payment for service fees. The fees that a debt settlement company charges its customers usually range from 15-25% of the entire balance. Some agencies may also require additional payments for administrative and service fees up front. Even others may ask for monthly payments from their clients. It is imperative to be aware of how a debt settlement company charges their customers, as you may end up paying more than what you actually owe. Make sure to ask for a copy of the fees and charges on paper.

Getting into the process

A consumer may choose to hire the services of a debt negotiation company, who will serve as an arbiter between them and the creditor. The organization will speak to the original lender in behalf of the borrower, with regard to the terms of the settlement. As mentioned earlier, negotiations can vary between 30-60%, depending on how much the company that an individual chooses to work with the offers. Some debt settlement companies may also arrange for no calls from collection agencies who work for the lenders, although there is a rare success rate of actually having all the collection calls stopped.

Another alternative of settling the debt is for the consumer to come up with the entire lump sum of the settlement amount. They can also choose to set aside certain amounts for a certain period of time to complete the settlement. At any rate, the agencies typically have had worked with these creditors in the past, and arrangements may come easier than what is expected.

When the creditor agrees to the settlement proceeding, the customer will now be dealing directly with the debt settlement agency. They will start making payments to the firm by depositing the funds either in a personal savings account by the debtor, authorizing the debt settlement company to make regular withdrawals from it, or in a third-party savings account insured by the FDIC, or the Federal Deposit Insurance Corporation. In fact, the two most common banks that debt settlement companies have used for their clients are Trust & Key Bank and Rocky Mountain Bank. These standards are based on safety and security standards that have been set by the Association of Debt Settlement Companies (TASC), an organization of debt settlement companies that exist to promote good, lawful and orderly practice among debt settlement firms, and protect the rights of their consumers.

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