refers to a reduction in the debt
amount that is negotiated between the debtor and the creditor. This financial instrument is appropriate for individuals who are solvent and have a constant income in the form of monthly paychecks or other sources of funding. In addition, the amount which is due should exceed $10.000 of unsecured debts such as personal loans and credit card borrowings. Debtor settlements do not cover secured debt in the form of mortgage loans, car leases, student loans, etc. In general, this service represents an alternative to bankruptcy. However, only insolvent individuals are eligible for bankruptcy
and consumer proposals
. Debt settlement is available to solvent persons with poor credit rating who do not plan to apply for large credits in the next 5 to 6 years.
Debt settlement is appropriate for persons who are unable to obtain debt consolidation loans
. Individuals may hire a lawyer or a professional company to work on their behalf. During the initial phase, the debtors cease to make payments to certain chosen creditors. They are saving money in a so called debt settlement fund. With time, money will accumulate in the fund of the debtor. The creditors will be more willing to agree on favorable debt settlements such as 30 to 50 cents on the dollar. Usually, debtors will be able to pay off their dues at around 50 cents on the dollar, including the fees, payable to the negotiating company, and all settlement costs. The debt settlement companies have typically developed relationships with various credit card companies. Therefore, they can negotiate a debt settlement with relative ease. The present economic crisis pushes an increasing number of credit card companies into debt settlements and debt consolidation loans
with the borrowers. The alternative scenario is to write off their borrowings as bad debts. In this scenario, the borrowed funds will be lost as the debtor files for bankruptcy.
Individuals may still arrange a debt settlement if the creditors have started legal procedures against them. It should be noted that debt settlement applies only to persons who are able to meet their dues on time. Irregular payments will have a negative impact on the debtors` credit ratings. Furthermore, debt settlements will be shown on their credit reports. As known, the creditors examine the applicants` credit reports in order to assess whether they are eligible for lending.
The debtors may also negotiate debt settlements without the services of mediators. They can just contact the consumer service department of the respective credit card companies. In general, the personal debt settlement procedures will be a cheaper option in comparison with the services of a professional company. Moreover, the debtor has a vested interest in the debt settlement in contrast to a neutral third party.
An obvious advantage of the settlement procedure is that the individual will reduce the amount of money to be paid to certain unsecured debt creditors. Furthermore, the debtor avoids the stigma of court ordered bankruptcy while lowering his debt balance. In the ideal case, the debtor will manage to negotiate settlements with all of their creditors within a period of three years.
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