How a Debt Settlement Program Works

A debt settlement program can help you get out from underneath crushing debt and get someone in your corner who can help deal with hostile creditors. These programs will provide you with someone who can negotiate your debt for you and often obtain a settlement that is far less than what you owe. Below is a brief outline of how a debt settlement program works so that you can determine if it’s right for your situation.

Example of How Debt Settlement Works

In our example, we will be using a fictitious person by the name of Jenny. Jenny has run up some pretty hefty balances to the tune of $50,000. This debt is spread over 5 different credit cards and the monthly minimums have now become too difficult for her to pay.

Jenny doesn’t want to have to enter bankruptcy so she looks for and finds a debt settlement program to help her pay off her debts without having to file Chapter 11. The debt settlement company that she signs on with has four goals in mind for her.

Cease all payments she is currently making to creditors. She immediately stops paying on her cards and instead opens a bank account where the minimums she can pay are deposited.

Stop taking calls from creditors. Collection calls are one of the things that cause a lot of undue stress for those who are burdened with large debts. These calls are now taken by someone at the agency she hired.

Agency starts negotiations. Once Jenny has deposited a decent amount of money into the bank account she opened, the debt settlement agency begins working with each of her creditors to arrive at an acceptable payback arrangement.

Pay new amounts/minimums. The professionals in the debt settlement program convince creditors that she can only make reduced payments and they agree to allow reductions up to 60% of what was owed.

As this process is unfolding, Jenny begins paying off her balances using the money in the checking account she has established. This allows her to continue paying any bills that become due and restore any damage that’s been done to her credit report over time.

Fees Charged By Debt Settlement Programs

One thing people fail to realize is that these programs will cost you a fee. Usually this fee can be up to 30% of the balance that you originally owed. These programs will usually work with you on a payment schedule for that as well.

Because of these fees, you really need to carefully consider these costs versus those of a bankruptcy. You may actually find that it’s easier or more beneficial to do the latter.

Positives and Negatives of Using Debt Settlement Programs

Positives

You can avoid bankruptcy
You can condense all of your payments into a single payment
Stops aggressive collection practices
By negotiating better terms, you can ultimately pay less
Avoid having to deal with the courts and other legal actions against you

Negatives

You credit history and score will be negatively impacted
You may incur taxes from your settlement
You will have accounts with the indicator “settled” on them – which are viewed poorly

As you can see, debt settlement programs can be a valuable option if you are facing a pending bankruptcy or foreclosure. You just want to be very sure that it is the right decision for you because the consequences over time can make things worse. But, if you have the ability to make some kind of payment each month, a debt settlement program can help you reduce the amount you pay over time and get through largely unscathed.