Debt negotiation services, also called debt settlement
or debt arbitration agencies, are solutions that are right for you if you don't see any progress on a debt
management plan, or don't qualify for bankruptcy but unable to make
the required minimum payment.
Debt arbitration companies negotiate with creditors to reach an
agreed-to amount to pay off the original debt. The creditors are willing
to accept a reduction as much as 50-60% to collect a debtor's money
rather than risk losing everything if the debtor files for bankruptcy.
Debt settlement companies usually offer you a debt negotiation program
or plan, if you can't make the
minimum payment of a debt consolidation program or have not paid your
outstanding debt in the last 3 months. The firm
usually promotes this service as a bankruptcy alternative.
As a client of a debt settlement company, if successful, you will get
out of debt with less money and in a shorter time period than other
types of debt solutions.
How Debt Negotiation Services Work
Once you participate in a debt negotiation
or debt settlement program you stop paying
your creditors. The debt
negotiation company then takes monthly payments from you
and stores it up in an account. Alternatively, they can ask you to store up the
money in your own account.
During the accumulation of your funds, the firm negotiates a debt
settlement with your creditors for a lower payoff amount. Once the
settlement is reached the company makes a lump sump payment to your creditors.
In this arrangement,
the more cash you have the quicker the settlement finalization.
Depending on the amount of money, you will have two scenarios. First,
you settle your debts for less than the amount of the lump sum. Or, you
settle most of the debts, and there is a small amount left over for
which you are setting aside funds on a monthly basis to make
settlements. The debt settlement
lawyer also requires creditors to report
"paid in full" to prevent negative remark in your credit report once you
settle them.
The debt arbitration firm will be compensated by a commission based on how
much your debt is reduced. The firm should have a solid procedure for
following up on any calls that you receive after initial correspondence
with the creditors.
There will be an administration fee to cover this
work.
Reasons to Consider a Debt Settlement Service
There are different reasons for opting to a debt negotiation plan.
You are already on a debt management program and seeing no progress. Your
income makes you do not qualify for bankruptcy, but you are unable to make
the minimum payment. Or, you may have some home equity that you can use
to get out of debt.
If you have large outstanding debts, a debt settlement program has a much
better long term outcome than bankruptcy.
But debt negotiation plans can be very risky and can have a negative
impact on your credit rating. If your creditors never agree to settle
you will end up with bad credit. This is the reason why many debt
negotiation services provide credit repair services -- additional
services that will remove
negative items caused by the program.
