What is debt settlement ?

Debt settlement is a situation in which a creditor and the debtor are able to reach an agreement to fulfill a debt for less than the current amount of debt. Creditors can choose to follow this path when economic downturns make the debtor cannot pay the amounts due. Sometimes referred to as debt negotiation or debt arbitration, the primary function of the debt settlement is to avoid costly legal fees and procedures developed while allowing the debtor to quickly reduce the number of obligations that he or she is trying to manage of his/her financial planning.

The use of debt to eliminate the debt overhang is a great help to the debtor. By making arrangements with creditors to pay a smaller fixed amount within a specified period of time, the need to file for bankruptcy is more or less eliminated. At the same time, the debtor can avoid further accumulation of late fees and other charges that may apply to credit accounts that are lagging behind. In return, the debtor also agrees that the accounts be closed to buy more.

For the creditor, the debt settlement makes it possible to avoid the possibility of filing for bankruptcy creditors. In many cases, the creditor sees only a small percentage of the balance recovered once the bankruptcy has occurred. No wonder that the creditor does not receive any kind of recovery if the debtor has no assets that can be converted to cash and delivered to the court for distribution.

There are some drawbacks to this strategy of debt reduction. Often, a debt settlement will be classified as such on the debtor's credit report. While not considered as bad as a default, this type of listing often make a negative impact on the FICO score and credit rating of the debtor. It may take years to recover and return to a good rating and a healthy FICO score.

Creditors also lose some of the revenue and lose all rights to any late payment or increased finance charges that would have applied if borrowers are struggling to make minimum payments each month. However, this partial loss of income is preferable to a complete defect that cannot be retrieved, or the debt being wiped by a bankruptcy.

It is important to note that if the borrower defaults on the terms of the settlement of the debt, he or she is open to legal action by the creditor. In general, the creditor will make an attempt debt settlement with the debtor. If the debtor fails after agreeing terms with them, it is likely that the creditor use all legal means to collect the amount due.

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