This is the third in a series of posts regarding the alternatives to bankruptcy. The series will discuss debt consolidation, debt settlement, mortgage modification, and debt management programs.
What is Debt Settlement?
Debt settlement involves negotiating with your creditors to accept a lump-sum payment that is less than the total you owe. For example, if you owe a credit card company $8,000 and are not making payments, the company may agree to accept 50% of what you owe in order to recover some of the owed money. Debt settlement can only be used on unsecured debts like credit cards or medical bills.
There are a few different approaches to debt settlement. First, you (as the consumer) could take the time to come up with a budget and call each creditor as you have money to pay to see if you can come to an agreement regarding settlement. Second, there are attorneys that you can hire to assist in making those calls and negotiating with the creditors. Finally, there are debt settlement companies who create a plan for you and negotiate with creditors on your behalf.
Who Should Consider Debt Settlement?
Debt settlement may be an option if you have some cash available, but not enough to pay off everything you owe. Bankruptcy may not be able to protect all of your assets in this situation, so negotiating with your unsecured creditors may result in paying a smaller percentage than the bankruptcy court would require in a Chapter 13 repayment plan.
Because debt settlement usually requires a lump sum payment, it is often not a good option for those with little or no cash available. There are some debt settlement companies who will assist you in establishing an account to accumulate money towards lump sum payments, however be very careful to find out how much the service is going to cost you and what happens if the debt is not settled.
This is just a basic overview of debt settlement and is not legal advice specific to your situation. If you are considering bankruptcy or alternatives to bankruptcy, you should speak with an attorney in your area for legal advice.