Debt Settlement
Debt Allocation
Debt allocation summary:
Debt allocation is the distribution of a borrower’s settlement money in a specific order to pay off creditors.
A borrower can prioritize who gets paid first based on debt size or how open a creditor is to settling.
Doing it yourself saves on fees, but a professional company can make the process easier by handling negotiations.
Debt Allocation Meaning and Definition
Debt allocation is the distribution of funds for debt settlement. Debt allocation is simple when a borrower has only one creditor. With multiple creditors, a borrower must find a way to prioritize who gets paid first.
You or your debt settlement company may allocate based on several factors:
Debt size
Interest rate
A creditor’s willingness to settle
More on Debt Allocation
Let’s say you lose your job unexpectedly and find yourself in a tough financial spot. When you’re unable to repay your debts in full, you could turn to debt settlement. You find a company that will negotiate with your creditors to pay a reduced amount, typically in a lump sum, to resolve the debt.
You and your debt counselor will likely discuss which creditors to pay off first—in other words, how to choose a method of debt allocation.
Let’s go through how debt allocation works in debt settlement.
Key Components of Debt Allocation
You or your debt settlement company may allocate money based on a handful of factors. Some creditors are more willing to settle—you might allocate funds to these first. Some harass you for smaller debts—you might pay these first to build momentum, like in the debt snowball strategy.
Factor | Why it matters |
Willingness to settle | Some creditors are more open to accepting lower payments |
Debt size | You may pay off smaller debts first to build momentum |
Interest rates | You may prioritize high-interest debts first to save on interest |
Legal issues | You may prioritize debts in collections to avoid legal trouble. |
Types of Debt Allocation
There are a couple of ways to manage debt allocation when you negotiate debt. Here’s how they work:
DIY debt allocation. You save up and distribute funds for settlement through your personal bank accounts. You decide when and how to negotiate with creditors.
Professional debt allocation. Under the guidance of a professional debt settlement company, you save and distribute funds for settlement using an escrow account, which is owned by you and managed by a third party.. The debt settlement company negotiates settlements with creditors on your behalf.
DIY debt allocation is more flexible than hiring professionals and may be cheaper if you’re skilled at negotiating. Using a professional company is simpler and requires less knowledge and effort on your part.
Debt Allocation: a Comprehensive Breakdown
Knowing the key players and how debt allocation works can help you understand how debt settlement companies distribute settlements.
Key players: who does what in debt allocation
Aside from debtors (that's you!), participants in debt allocation for debt settlement are:
Creditors: Negotiate with debtors to settle debt. A creditor is anyone to whom you owe money. In settlement, this is typically a credit card company, a debt collection agency, or an independent debt collector.
Debt settlement companies: Represent you, the debtor, in settlement negotiations. Debt settlement companies charge you a fee once they’ve successfully negotiated settlement.
Escrow account administrators: Manage money in escrow. This may be a third-party service or the debt settlement company. Administrators are responsible for holding and sending funds from the escrow account to creditors once settlements are finalized.
How debt allocation works
Here are the steps you’ll take when you settle through a debt settlement company like Freedom Debt Relief:
Enrollment. Enroll in a debt settlement program and agree on a monthly amount you can afford to save.
Escrow. Set up an escrow account to hold the funds you save.
Funding. Make deposits to the escrow account monthly.
Negotiation. Your settlement company negotiates with creditors.
Allocation. If you agree with a negotiated settlement, you authorize the company to distribute funds to creditors.
After each settlement, the creditor marks the debt as settled or paid in full.
Debt Allocation FAQs
How debt relief works
Debt relief is a simple process to start, although it can be challenging to finish. It is really helpful to have professionals helping you get there.
Debt relief works by getting your creditor to agree to change the terms of your debt. That could mean lowering your payments or even forgiving your debt.
For a simple credit card hardship program, you must convince the credit card company that you can't afford the payments. They will require a substantial amount of paperwork.
The process is easier when dealing with a debt settlement company because you have professionals helping you. You need to stop making your payments, start building up funds for negotiation, and then negotiate a settlement.
What are the biggest debt allocation mistakes people make?
Avoiding help. Don't let negative emotions or a feeling of shame cause you to hide from help. You can get free help from reputable companies online, or you can get professional help from a reputable debt settlement company or an accredited credit counselor. The smartest thing you can do is learn how to handle your money and create financial security for yourself. If you feel lost, reach out. At Freedom Debt Relief, our mission is to help you find the debt relief solution that's right for you, even if it doesn't include our services. If you are keeping up with your payments and don't want a loan or debt settlement, but you can't seem to get ahead, start by finding a nonprofit credit counselor or financial counselor. Two good places to check are the NFCC and the AFCPE®.
Not having a budget. To get a handle on your finances, you need to be clear about the money coming in and the money going out. Your budget gives you knowledge and power. With a budget you can make an informed choice about every dollar you spend. Without a budget, you'll be stuck on guesswork that might or might not have success.
Charging more. If you continue to use credit cards, your debt payoff will take longer. You might even chase your tail indefinitely. If you're serious, and ready to get rid of your debt, close the credit card accounts. Keep one open for emergencies if you need to, but lock it so that it can't be used impulsively. Use a debit card for everyday purchases.
Do creditors settle with consumers who try DIY debt allocation?
Some do and some don't. Every creditor has its own policy. Some do not settle debt, period. Others have relationships with debt settlement providers and are accustomed to working with them. The bottom line is that DIY debt settlement is possible and there is no reason not to attempt it. You can always hire a debt settlement company if you want professional assistance.
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