Debt Settlement - What It Stands For?

Debt settlement is resolution of non-repaid and accumulated debt of an individual. When an individual defaults his/her repayments of loans taken, and when the debt mounts, he or she falls into debt trap. Such individuals need the help in the form of debt resolution. It is credit counseling service providers’ business to do just that.

It entails consulting and bargaining with a creditor for an agreement on a condensed amount that will be acknowledged as complete repayment. In other words, if you default on your payments, your original lender/lenders might just be agreeable to arrive at a deal that gets them at least a part of their lent amount in one nice chunk. This type of settlement is open for unsecured loans such as credit card outstanding amounts. When debt burden becomes heavy, then settlement is a practical choice.

Settlement of Debt, by now, has turned out to be a well-liked method of dealing with unhealthy debt accounts. Such arrangements facilitate individuals to negotiate a highly discounted repayment option of their overall outstanding amount. The dialogue process is made in an official manner and the settlement conditions as well as the settlement amount are recorded as per the agreed terms arrived at by both the parties. Debt resolution plans differ contingent upon the various kinds of debts. One can get a good deal of settlement with the help of skilled service providers. Typically, settlement companies counsel their customers to renege on payments and advise instead to accumulate cash, the amount of which the company will utilize to arrive at a deal for one single large payment.

Risks involved in Debt Settlement

There are several risk factors involved in debt management.

• Scam Companies. There are several fraud companies that offer debt settlement service and disappear once they get upfront fees from their customers. Some may be pretenders. They may not be well-equipped with the intricate procedures of debt settlement that may harm the customers.
• Dented Credit Score. An individual’s credit rating is bound to get a beating. Opting for discounted payment of the original loan will only add negative score to one’s credit standing.
• Legal complications. Defaulting borrowers face a barrage of lawsuits from debt recovery legal firms. Salary deductions and other monetary measures like lien on property will follow for loan defaulters when legal sanction is given.
• Regulatory Deficit. In the US, the federal government has no control over debt-settlement companies, though the FTC (Federal trade Commission) is trying to  enforce some regulations. Very few states has regulatory control.
• Taxes. The differential between what one owes and what one shells out in a settlement normally is regarded as taxable income by the IRS. So if one is in the 25% federal tax category, one could be obliged to pay $2,500 for every $10,000 in debt that's exempted.
• Company Charges. The option of settlement of debt is very expensive. Some companies charge 14% to 18% of the entire face value of the debt one intends to settle. Others demand a huge proportion of the sum they settle for their customers.
• Time Consuming. It is not only costly, but debt resolution generally takes long time. Jack Craven, the President of Debt Settlement USA says it would take two years for the debt settlement process to conclude.

One should ensure that professional providers are government registered companies. Company history is paramount. One should be careful while disclosing one’s financial matters while still in the process of negotiating with these companies. One should decide on appointing a company only after due diligence. Debt settlement is a way forward for people with unmanageable debt.