What Is Debt Mediation?

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As of the last quarter of 2013, consumer debt represented 5.14 percent of a household's disposable income according to the Federal Reserve. This represents a a slight increase from 4.94 percent over the previous year. Many Americans find themselves over their heads in debt and may not know where to turn. But you do have options to get yourself out of debt that does not involve filing bankruptcy. Debt mediation offers one way to get yourself back on the road to financial solvency.

Debt Mediation

Debt mediation allows you to sit down with your creditors and come to a mutually beneficial agreement about how to pay off your debts. This is done either individually or with a debt mediation service. The latter can help you get a better settlement, but it isn't done for free. Much of what you save can be lost in charges levied by the debt mediation company that helps you.

Debt Mediation Process

Debt mediation works by lowering your interest payments to the concession rate -- the lowest rate offered by the credit card company -- and coming to an agreement on the amount of principal reduction. You can consolidate your debts into one monthly payment paid into a trust account that the debt mediation company then pays out to your creditors at the agreed-upon rates. This payment is pegged to a specific period usually between two and three years. This allows you to know when you will be out of debt and to tailor your monthly payment to that calendar.

Credit Rating Effects

One downside of debt mediation is that your credit rating initially plunges. Debt mediation indicates to future creditors that you have borrowed more than you can pay back. But once you start making regular payments, you begin to see your credit rating improve. Your credit rating significantly improves once you have paid off all your debts. Debt mediation allows you to turn negative spots on your credit into positives. Because these negative effects are temporary, they do not compare to the effects of late payments and rising credit balances. Late payments can affect your credit rating for up to 7 years.

Mediation Services

With many scams out there, it's important to know what to look for in a debt mediation service. The most important factor is the service's history and the kinds of settlements they have achieved for their clients. Look at the company's reputation in the debt mediation community, including professional organizations such as the American Association of Debt Management Organizations and the National Foundation for Credit Counseling. Also check the Better Business Bureau rating of the potential mediator.

References

About the Author

Nicholas Pell began writing professionally in 1995. His features on arts, culture, personal finance and technology have appeared in publications such as "LA Weekly," Salon and Business Insider. Pell holds a Bachelor of Arts in English from the University of Massachusetts at Amherst.

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