Debt Settlement
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Filed under Debt Settlement
Debt settlement refers to a process of reducing debt by negotiating with creditors. Whatever balance they settle on is then considered as payment in full. Creditors opt for debt settlement when the debtor becomes unable to pay the debt, while the balance keeps increasing due to late fees and ongoing interest. A debtor may hire a debt settlement company or lawyer, or take tips from the internet to settle his/her debts.
Debt settlement is sometimes also referred to as debt arbitration or debt negotiation. It eliminates the astronomical legal costs and enables debtors to manage their debts.
Debt Settlement: Benefits for Debtors
Debt settlement is advantageous to debtors, since it prevents outstanding debt. They can also save themselves from the humiliation of filing for bankruptcy. Debt settlement allows them to pay a smaller fixed amount for a particular time period. This also prevents many other charges, such as the accumulation of more late fees that debtors have to pay. Moreover, it enables both parties to close the credit accounts that are falling behind.
However, debt settlement reflects on the credit report of debtors, reducing their FICO score and credit rating. Regaining a good FICO score may take years.
Debt Settlement: Benefits for Creditors
Creditors also stand to benefit through debt settlement, since they do not have to file for bankruptcy. In most instances, if bankruptcy occurs, only a small portion of the outstanding debts can be recovered from debtors. It is not unlikely that creditors do not receive any money if debtors do not possess any assets that can be liquefied and distributed by a trustee among the various creditors. Creditors can also save on the expenses associated with the attempt to collect money.
Also, they do not have to go through the hassle of complex legal procedures and paper work. However, they lose money they could have generated by charging late fees, had the debtor been paying the minimum monthly payments. They also lose existing due revenues. There is no doubt about the fact that through debt settlement, creditors will bear only partial losses rather than losing all the money through a bankruptcy action.