What is debt settlement?
Debt settlement is otherwise known as credit settlement, debt negotiation or debt arbitration. It is a kind of approach or strategy to reduce debt wherein the creditor and debtor agree on a reduction of the outstanding balance which when cleared is then regarded as full payment of the debt.
It is an effective option for credit card debt relief. This is a viable option for people who are struggling with keeping up with their mounting financial debt. The other option available is debt management.
How does it work?
When you opt to choose debt settlement as your credit card debt relief, the first thing that you should do is to contact the creditor. Most of the time creditors send periodic settlement statements and some require negotiation when it comes to the settlement of any outstanding debt.
Once the agreed payment is made, the creditor will send a bill with regards to the final settlement of the amount which must be fully paid. When you go through this debt settlement, it will lead to the significant reduction of the total outstanding balance. You normally have the option to pay the debt amount or agreed financial payment either in installments or in one lump sum payment.
What are the pros of debt settlement?
Prior to undergoing such debt settlement, you must be mindful of the pros or the benefits that it offers:
â You will have the opportunity to pay the minimum agreed payment settlement
This is made possible because of the settlement agreed by both parties, which are the debtor and the creditor.
â It allows you to avoid bankruptcy
This is another good reason why people choose debt settlement instead of the other option which is debt management.
â It does not require an attorney
When it comes to debt settlement between two parties, the presence of an attorney is not needed. Hence, you will save by not having to pay the professional fees of an attorney.
â You will be able to pay your debt in fewer payments agreed by both the creditor and debtor
When you opt to settle your own debts, you can actually reduce by as much as 60 percent the final balance of debt which is due. You will save both on the outstanding balance and the interest charged and it will also shorten the time in which you clear the debt.
What are the cons of debt settlement?
Despite the fact that there are pros to debt settlement, there are also cons that you should remember:
â Calls from creditors
This is expected since the creditors want to have their borrowed money returned. You should never ignore calls from them; ignoring their calls can lead to further problems.
â It lowers your credit score
When you don’t pay your debts on time, you will have a lowered credit score which gives a bad image on your behalf.
â You need to pay the taxes on savings
Money saved through debt settlement will be counted as income for tax purposes. There is a need for you to pay your taxes when you opt for this kind of debt settlement.