How Does Debt Settlement Work?

by Chris Sherwood ; Updated July 27, 2017
How Does Debt Settlement Work?

What is Debt Settlement?

Debt settlement is the process in which one works with creditors to pay only a percentage of the total debt owed as the final settlement amount. Debt settlement offers can vary dependent on the company and how badly it want to be paid. However, in most circumstances debt settlement is a real option to help relieve some of the debt load from a person.

The Numbers

When looking into getting a debt settlement, it's important to understand how much money you may be able to negotiate off your debt. The standard percentage to settle a debt for is 40 percent to 60 percent of the original debt amount. The actual percentage that the company will be able to settle for depends on how long the debt has been in collections, how eager the creditor is willing to be paid, and how big of a risk the creditor feels you are for bankruptcy.

Why Creditors Settle

It may seem strange for a debt collector to settle for substantially less than what is owed to him. However. debt collectors realize that many people who are behind in their bills will eventually file for bankruptcy. If this happens, the debt collector in most cases will get nothing.

How it works

To start a debt settlement, contact your creditor. Many creditors will send out settlement offers periodically, but others will require that you contact them to negotiate a settlement. Once the creditor has agreed to settle, you'll be sent a bill for a final settlement amount. That amount must be paid in full upon billing unless another arrangement has been made. Once paid off, the creditor will document this and note it on your credit report.

Advantages/Disadvantages

The obvious advantage to a debt settlement is paying less money for a debt. It also opens up more monthly funds to put toward other bills on your way to being debt free. There are some disadvantages to a settlement. First, the full settlement amount is usually due soon after the settlement has been made. If you do not have the cash available, the debt settlement may not be a good option. Another disadvantage is that the creditor may report it in your credit report as paid/settled. This shows other companies pulling your credit report that the debt was not paid in full, which may look bad for you until the debt has been removed completely from your file.

About the Author

Chris Sherwood is a professional journalist who after years in the health administration field and writing health and wellness articles turned towards organic sustainable gardening and food education. He now owns and operates an organic-method small farm focusing his research and writing on both organic gardening methods and hydroponics.

Photo Credits

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