Debt Settlement

Debt settlement is a process whereby you come to agreement with the creditor on a debt that you owe him to pay only a portion of the debt in return for the debt being forgiven.

Debt settlement is nearly always done in situations where the debtor is so far behind in his payments that it looks like the debt may never be paid. In an effort to at least get something out of the situation, the creditor will agree to a reduced lump sum payment from the creditor to void the debt.

A debt settlement may be initiated by either the creditor or the debtor. If you decide to initiate the debt settlement, you may feel more comfortable using the services of a debt settlement attorney, although one is really not necessary.

Credit card companies are relatively aggressive in offering debt settlement to clients whose credit ratings have tanked over the years. They also have enough experience and historical collection data to be able to determine the "sweet spot" of debt settlements. In other words, they know exactly when is the best time to offer it to a client, the odds of him agreeing to it, and the maximum amount of the lump sum that they can get from the client. This information gives them a huge advantage in negotiations.

Even though a debt settlement can get lessen the debt load of a person, which is a good thing, it does come with a couple of disadvantages as well.

1) If you agree to the debt settlement, you will have to come up with the lump sum amount with which to pay them. In most cases, that means taking out another loan. Since your credit score is probably suffering at this point, odds are that you will not be able to get an unsecured loan. The other alternative is to take out a home equity loan - which many people do. If you do so, you have, in essence,  swapped an unsecured loan (e.g., your credit card) for a secured loan (your home).

Is that the right decision? Only you can decide.

2) The second drawback for a debt settlement is that it will still, in most cases, show up on your credit report. So you will still have a problem getting loans at decent rates - assuming you can get a loan at all. This, however, may not be as bas as it sounds, since most likely your credit score is already low.

Debt settlement is a very useful tool and should definitely be considered as a means of getting you out of debt faster. Like any other financial tool when it comes to financial matters, however, you have to know how to use the tool in order for it to be most effective.

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