What is debt settlement?

Keeping up with the monthly payments related to credit card debts can become increasingly difficult in these times of financial hardship. An individual may completely be unable to clear up their debts and eventually file for bankruptcy. This of course leaves the creditors at a loss since they may not be able to recover the money owed to them from the debt or may recover a considerably lower amount than they were owed. Debt settlement entails negotiations between debtors, who are unable to keep up with payments to settle the debt at a fraction of what they may owe.

Debt settlement negotiations are meant to strike a deal between the debtor and creditors for lower payment rates or to reduce a percentage of the amount owed.  It typically works by creditors agreeing to acknowledge settlement of the payment by extending a onetime payment amount to the creditor. The settlement amount usually adds up to about twenty to seventy-five percent of the balance that is actually owed. When an agreement to cut the debt has been agreed too, this enables the debtor to comfortably meet the payment without having to resort to the declaration of bankruptcy. The creditors benefit from treating the balance as a new payment which in the long run makes them more money than if the individual had forfeited payment by declaring bankruptcy.

Debts settlement programs are made in relation to unsecured loans; loans which were acquired without collateral security. Since these loans are taken without collateral, they pose a high risk to the creditor in the event that the debtor cannot meet the payments. Secured loans on the other hand are a little bit risk free since the creditor can easily seize the collateral, which are usually assets or other property, to recover back the loan.

Generally, that is why unsecured loans carry higher interest rates as opposed to secured loans. The types of debts you can include are credit cards debts, unsecured loans, collection bills and even hospital bills. Mortgages, auto financing and student loans are not considered valid debts by the debt settlement programs.

The debt settlement payment plan as with every other payment plan out there is not for everyone. It is designed for consumers whom cannot meet the monthly obligations for their credit card or collection debt. If your struggling financial hardship, this solution may be in your best interest.

As a person who is deeply rooted in debt, it is wise to seek proper financial counsel before opting for a debt settlement plan. It is wise also to look deeper into the companies offering debt settlement plans and understand what the implications in entering the settlement plan with them will entail. Such companies usually have hidden charges in relation to their services meaning that they also deduct a percentage of the settlement amount from the amount set aside to honor the settlement agreement with the debtors. There are always other solutions to clearing up debts without involving third parties in this instance debt settlement companies.