Debt settlement can be an alternative to bankruptcy if you want a solution to your financial challenges. Also called debt arbitration or credit settlement, debt settlement is an agreed upon arrangement between you, the debtor, and your creditor on a reduced balance that will be regarded as payment in full. For you, this can be a proactive plan of action that helps you to resolve costly bills in an efficient manner that avoids filing bankruptcy. For the creditor, this can be a way to recover more dollars than would otherwise be recouped if collection agencies were hired to handle delinquent debt. You can either work out the details of the negotiation yourself or opt to hire a debt settlement company to guide you through the process. (See also should you declare bankruptcy or settle debt).
Do-It-Yourself
Handling debt settlement negotiations yourself will save you the cost of retaining a company to speak with creditors on your behalf. It will also provide you greater control over the process, including the opportunity to speak with creditors about your circumstances and to tell your story in your own words.
- Be honest about your situation so that your creditors understand that you are committed to fulfilling your promise of payment.
- Let them know how much and when you can pay monthly to see if arrangements can be made to accommodate your situation.
- When you reach out to your creditors, ask to speak to a supervisor who has the authority to discuss and to approve modified payment terms.
The potential downside to the do-it-yourself approach is that you will be on your own to understand the settlement offers and terms, and you may not be able to negotiate as advantageous a settlement plan as would a debt settlement company or attorney that might have an established relationship with your creditor.
Debt Settlement Companies
Hiring a debt settlement company may prove beneficial since these professionals typically package settlements into a bulk settlement for 35% to 50% of the existing balances, which means that this savings is passed on to you. Because the companies generally have relationships with creditors, they most likely will come to an agreement faster then you might if pursue the do-it-yourself approach.
Nevertheless, you should know that debt settlement companies typically charge a percentage of what they save you as a fee for their services, which may not include handling calls from credit card companies and collection agencies. To better protect debtors, however, the U.S. Federal Trade Commission (FTC) will enact new legislation as of September 2010 that will bar these companies from charging upfront fees and that will permit them to collect only fees that are proportionate to the settled debt once services have been rendered. In addition, the new ruling will require that any dedicated account into which a debtor pays as part of his settlement be listed in his name rather than that of the company and be established at a financial institution that offers federal deposit insurance.
Getting Help
When dealing with debt settlement, your best option may be to work with an attorney experienced in debt settlement. Like debt settlement companies, your lawyer will have an established relationship with creditors and will be able to negotiate a better deal than you could on your own in most cases. However, unlike debt settlement companies, attorneys are bound by the code of their profession to charge fair fees and put their clients interests first, so you can be assured of getting the best representation possible.
