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Debt Reduction

Debt Settlement 

If you, like many people in the current economic climate, are struggling to clear your debt, then debt settlement may be a viable option. Below we have outlined some important facts about debt settlement, how to negotiate one and the pros and cons of choosing to go this route.

 

There are many companies that offer debt settlement services if you don't want to do it yourself but just make sure they disclose any fees you will incur for their services.


What is Debt Settlement?

Debt settlement refers to an option sometimes offered by collection agencies and other creditors to settle debt for an amount less than the total current amount owed. On high interest loans it's usually not the initial principal that kills you but the accumulation of interest charges over time. When you make a purchase with credit you agree to pay the total purchase price plus any interest incurred during the repayment period. Often people become consumed by debt due to high interest rates; they may take on debt with the thought that they are able to repay the purchase price but, neglect to consider the effect interest will have on their repayment plans. Monthly minimum payment amounts are based on a percentage of the principal amount borrowed plus accrued interest. Interest is accrued daily or monthly based on the terms of the loan (principal plus interest to date). When debtors pay the minimum monthly payment each month they are mainly paying just the interest and very little principal.

 

When this involves credit cards people often make new purchases as well as not paying down the old. This causes the balance outstanding to continue to grow resulting in higher minimum monthly payments. As minimum monthly payment amounts rise, it becomes increasingly difficult to meet payment due dates. Missing due dates results in penalty fees being assessed further increasing the total amount owed. If you have found yourself in a situation like this, you may be able to negotiate a debt settlement.


How to Negotiate a Debt Settlement

To initiate a debt settlement you must contact the creditor or collection agency to which you owe money. Explain that you have found yourself in a position in which you are unable to make the required minimum monthly payments. Further explain that you are willing to pay a certain amount immediately if they will agree to settle the remainder of the debt. You should determine the maximum amount you are willing to pay prior to making the phone call and be prepared to pay that amount during the phone call. When you begin negotiations it is a good idea to first offer to pay only the original balance of the loan without interest charges or penalty fees. The creditor will probably counter your offer to include some portion of interest and fees.

 


Pros and Cons of Debt Settlement

Debt settlement is a good option for those who genuinely cannot afford to pay the total current balance of their loan. You will save money and the burden of debt will be relieved. It is important to understand that debt settlement is not the best option in terms of your credit score. However, if you have been missing payments your credit score may have already taken a hit. When a creditor agrees to settle a debt for less than the total amount owed this agreement is reported to the credit bureaus and your line of credit is closed. This action will be reflected in your credit score and will turn up on your credit report. If the only other alternative is bankruptcy however, it may be a better way to go and do less damage to your future creditworthiness.

The first thing I would suggest is getting a free credit report as well as reviewing your free credit score in order to see where you are at. If your credit score is already below 640 (considered sub prime) debt settlement or even bankruptcy may be a consideration. It's best to seek professional advise prior to making any decisions that can have such a dramatic affect on your financial future.