Debt Settlement

Debt settlement summary:

• Debt settlement is when you negotiate with a creditor or debt collector to accept less than the full amount you owe, and forgive the rest of the debt.

• Debt settlement can help reduce your debt load

• You can settle debts on your own or hire a professional debt settlement company to help.

Debt Settlement Definition and Meaning

Debt settlement, also called debt relief or debt relief, is the process of negotiating with a creditor or debt collector to pay off a debt for less than what is owed.

Creditors want to be fully repaid. But if you’ve already fallen behind, or you’re in a situation where you’re unlikely to be able to fully pay off your debts, your creditors might understand that getting something is better than getting nothing. Suing you for the debt is expensive, and there’s no guarantee that they’ll win. So when the situation calls for it, some creditors are willing to be flexible.

More About Debt Settlement and How it Works

Basic debt settlement has three steps:

1. Verify that the debt is yours.

2. Figure out how much money you can pay towards that debt.

3. Contact the creditor or debt collector with your offer.

The lender or debt collector can decide to accept your proposal, offer you a counterproposal, or reject the offer outright. The process may require several rounds of negotiation to reach a compromise.

Debt settlement negotiations are most effective when you can demonstrate financial hardship to your creditors. Financial hardship is a situation that harms your finances, like losing your job, getting divorced, or if a family member dies. 

What if you don't have a lump sum to offer?

If you don’t have money to offer, you can ask for a payment plan or you can start setting aside money each month to build up funds. 

Some creditors may be willing to work out a payment plan that allows you to make payments over time. You could also wait and make your offer when you have a lump sum set aside.

To build up funds for settlement offers, many people choose to stop making payments toward their debts. When you fall behind on payments, it’s a strong signal to your creditors that there's something wrong with your financial situation. That could make them more willing to negotiate. Also, if you’re struggling to keep up with all your bills, stopping payments could be the fastest way to build up funds to offer your creditors.

Stopping payments is likely to have a severe negative impact on your credit standing. You could face higher costs, too, in the form of late fees and interest. 

You'll need to consider the potential pros and cons of debt settlement carefully before deciding on the best course of action.

Do Creditors Have to Agree to Debt Settlement?

Absolutely not. Creditors and debt collectors have no legal obligation to participate in debt settlement or repayment agreements.

That said, most debt-holders would rather have some of a debt repaid than none of that debt repaid. This is especially true of older debts.

Can You Settle Debts on Your Own?

Yes, it's possible to negotiate with creditors and settle debts on your own. It'll require organization, persistence, and the ability to spend time on the phone for negotiations. Working out a debt settlement agreement can take a significant effort.

Professional Debt Settlement

You can also hire a reputable debt settlement company that has more experience with successful negotiations. If they already have relationships with your creditors, and they should, a professional debt settlement company might be able to get a better deal than you could get for yourself. Expert debt negotiators do the heavy lifting to work out agreements. 

At Freedom Debt Relief, there's no fee until we come to an agreement with your creditor, you review and approve it, and at least one payment is made. 

Hiring a company to work on your behalf could save you time and hassle.