During these trying economic times, when some are barely able to pay for food, shelter and transportation, or are behind in minimum payments to their creditors, many often consider bankruptcy. Bankruptcy, however, may be a bad solution for some given its income and exemption limits. In those instances, debt settlement may be a solution.
What is Debt Settlement?
Debt settlement is a process where borrowers negotiate a settlement with their creditors for less than the full amount owed. Although this is a process borrowers can handle alone, an experienced attorney may be able to negotiate a better settlement than debtors themselves.
Beware of debt settlement companies. While there are some good and reputable companies out there, some debt settlement companies will take your money, in advance (against current FTC Regulations) and fail to negotiate a settlement, or even try. People should run, not walk, from attorneys or companies that guarantee they can work out a settlement. Only the creditor can authorize a settlement, and while the chances of settlement are likely, there can be no guarantee.
In addition, debt settlement works best for unsecured debt like credit card debt, personal loans, taxes, medical bills, and wholly underwater secured debt (like a second mortgage with no equity). Most secured debt, such as first mortgages and car loans, are very difficult to settle since the holder of those loans can repossess/foreclose the secured property.
General criteria that make debt settlement a good option for people include the following:
- They are unable to even make the minimum monthly payments.
- Their financial situation is such that there is little to no hope of ever paying the total amount due.
- They have resources to tap into to pay their debt, i.e. equity in a house, savings, retirement plans, or inheritance.
- They are considering bankruptcy but consider it a bad option.
- They can pay a lesser amount in a lump sum, or make a significant lump sum payment and affordable monthly payments thereafter.
Why should creditors agree to a debt settlement?
Creditors are usually willing to accept a settlement from people who are behind on their payments and considering bankruptcy. The creditor will most likely get nothing if the debtor declares bankruptcy whereas with a debt settlement program, the creditor will at least receive some percentage of the debt.