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When a debtor is at a point financially that a creditor becomes concerned about whether they'll receive payment from them, both sides may decide to
come to an agreement to pay back what's owed at a lower cost. This is referred to as debt settlement, because the creditor is settling
for a smaller amount than what is actually owed in total. This is also commonly called debt negotiation, (but the "negotiation" is in actual
fact the means of getting to a settlement, not the settlement itself).
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The creditor and debtor both have their own reasons for wanting to settle the debt at a reduced cost:
The Debtor: is trying their hardest to solve their financial problem without being reduced to declaring bankruptcy. In a situation where
they are unable to utilize debt consolidation to pay back what's owed, debt settlement is not as damning to their long-term credit
as declaring bankruptcy; and because the debt is paid off, it ends the harrassment from collectors and the other bothers that comes from having
bills that are long overdue.
For the creditor, accepting a debt settlement proposition means they will usually get much more than they would were the debtor forced to go bankrupt,
and it can also save them money compared to paying collection agencies and/or lawyers to try and attain the full amount.
This also means they'll receive payment faster, which reduces the risk of more bad debt from the borrower.
A lot of debt management services use a combination of both debt settlement and consolidation efforts whenever possible, reducing individual debts in
advance of consolidating them into one debt at a lesser interest rate.
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Kinds Of Debts That Can Be Settled
The majority of unsecured types of debt can be settled in the right situations. An unsecured debt would mean there was no collateral needed to get the
loan, such as credit cards or service bills. Some examples of secured debts would include things like a mortgage or car loans, which
would be used as collateral/security.
Some examples of potentially negotiable debts would include:
- Old service bills (like utilities)
- Department store credit cards
- High-interest credit cards
- Legal and medical bills
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- Tax debts
- Student loans
- Collection agency debt
- Personal loans (unsecured)
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Debt settlement terms can change based on the debtors individual situation, and creditors are not required to entertain settlement
propositions at all. It's more likely for creditors to consider a proposal when they are concerned about the debtor going bankrupt, in which
case receiving anything directly from the borrower is often preferable to what will be received from a bankruptcy settlement.
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