Posts Tagged ‘debt consolidation’

Debt settlement, also called credit settlement, debt negotiation or debt arbitration, is a method of reducing debt. Usually used as a last resort and only considered in dire circumstances, to settle a debt means to negotiate with a creditor (usually a bank) to reduce the total amount owed. Essentially, you and the bank agree that you will be unable to pay off the entire debt, and settle on repaying a smaller amount that you can actually manage. It might seem, on the face of it, that the bank is being altruistic somehow, letting you off instead of taking every penny. Actually, this is not the case – the bank is still acting very much in its own best interest. A vital part of most debt settlements is that the bank is convinced that you will be unable to pay off the debt and risk filing bankruptcy – and if you do that, the bank gets nothing at all.

Debt settlement is not a new idea; the essential concept is not complicated and has been around forever. However, it is only in the last few decades that it has become a common financial dealing. Bank deregulation in America around the year 1990 loosened the practices of lending to consumers, and this resulted in many of those consumers unable to pay back their debts. The catastrophe the banks faced was that they would get absolutely nothing back if those consumers filed for bankruptcy, and as a result they set up special debt settlement departments dedicated entirely to keeping people afloat just enough to get at least something back from them. In other words, the banks were trying to make the best of a bad situation, avoiding driving people into the ground so that they could be assured of at some return on their investments. Getting back 50% of the debt was better than getting nothing at all.

Banks still offer this sort of service today. If you are in genuinely dire straits, and can demonstrate it, the bank may see that the best possible option for both of you is to settle on a reduced debt, something that you are at least capable of paying back. The bank is cutting its losses. It is worth noting that when a bank decides to negate some of its profit, the situation must be pretty desperate! Debt settlement is certainly not a field to take lightly.

There may be, for example, some unfortunate results from debt settlement. Your credit rating will sometimes go down severely, as your credit report will likely, show clear evidence of the debt settlement, and future creditors will not want to take the risk that the same thing will happen again. It may be possible to get a “paid in full” letter, however, if the creditor agrees to it, and this should negate any reports of debt settlement. There may also be other dangers —a lawsuit is a possibility any time a debt sits unpaid. Tax consequences are also a worry.

Like all forms of debt relief, including debt consolidation, you need to be careful when dealing with debt settlement companies. It may seem like a whole lot of extra paranoia on top of your existing problems, but it is well worth remembering that any companies you deal with are ultimately out to make a profit – their bottom line is the bottom line. There are many stories of debt consolidation companies interviewing potential clients, alleging to provide an objective, realistic appraisal of their financial situation, and then vastly overstating the financial burden of the client, hoping to take advantage of the client’s lack of knowledge about money and the legal system in order to sell them their services.
Debt settlement, also called credit settlement, debt negotiation or debt arbitration, is a method of reducing debt. Usually used as a last resort and only considered in dire circumstances, to settle a debt means to negotiate with a creditor (usually a bank) to reduce the total amount owed. Essentially, you and the bank agree that you will be unable to pay off the entire debt, and settle on repaying a smaller amount that you can actually manage. It might seem, on the face of it that the bank is being altruistic somehow, letting you off instead of taking every penny. Actually, this is not the case – the bank is still acting very much in its own best interest. A vital part of most debt settlements is that the bank is convinced that you will be unable to pay off the debt and risk filing bankruptcy – and if you do that, the bank gets nothing at all.

Debt settlement is not a new idea; the essential concept is not complicated and has been around forever. However, it is only in the last few decades that it has become a common financial dealing. Bank deregulation in America around the year 1990 loosened the practices of lending to consumers, and this resulted in many of those consumers unable to pay back their debts. The catastrophe the banks faced was that they would get absolutely nothing back if those consumers filed for bankruptcy, and as a result, they set up special debt settlement departments dedicated entirely to keeping people afloat just enough to get at least something back from them. In other words, the banks were trying to make the best of a bad situation, avoiding driving people into the ground so that they could be assured of at some return on their investments. Getting back 50% of the debt was better than getting nothing at all.

Banks still offer this sort of service today. If you are in genuinely dire straits, and can demonstrate it, the bank may see that the best possible option for both of you is to settle on a reduced debt, something that you are at least capable of paying back. The bank is cutting its losses. It is worth noting that when a bank decides to negate some of its profit, the situation must be pretty desperate! Debt settlement is certainly not a field to take lightly.

There may, for example, be some unfortunate results from debt settlement. Your credit rating will sometimes go down severely, as your credit report will likely show clear evidence of the debt settlement, and future creditors will not want to take the risk that the same thing will happen again. It may be possible to get a “paid in full” letter, however, if the creditor agrees to it, and this should negate any reports of debt settlement. There may also be other dangers—a lawsuit is a possibility any time a debt sits unpaid. Tax consequences are also a worry.

Like all forms of debt relief, including debt consolidation, you need to be careful when dealing with debt settlement companies. It may seem like a whole lot of extra paranoia on top of your existing problems, but it is well worth remembering that any companies you deal with are ultimately out to make a profit – their bottom line is the bottom line. There are many stories of debt consolidation companies interviewing potential clients, alleging to provide an objective, realistic appraisal of their financial situation, and then vastly overstating the financial burden of the client, hoping to take advantage of the client’s lack of knowledge about money and the legal system in order to sell them their services.

All the same, if debt settlement is a requirement for you due to your situation, a professional settlement will almost certainly be better than trying to do it yourself, owing to the extra expertise and business connections and relationships that the debt settlement company will have built up over the years. A creditor is much more likely to deal favorably with a company with a proven record of accomplishment rather than directly with the very customer that owes them money. Shop around for a suitable company and choose wisely. Try to keep a level head, difficult though that may be given the stress you are no doubt under. Debt settlement is unlikely to turn your life around – it certainly will not make you rich – but it may help you to get through those dire straits and into the future on more secure footing.