Understanding how debt relief works is key to determining whether it represents the best solution for your circumstances. Debt relief, also referred to as debt settlement, does provide a method for reducing the amount you owe to certain types of creditors. However, it’s important to note there are certain consequences to availing yourself of that assistance.
What Debt Settlement Can Do
People struggling to pay medical debts, credit card bills, personal loans, private student loans and many other types of unsecured debt can use settlement to renegotiate loan contracts to make resolving them easier.
Debt relief organizations work with creditors to reduce (or waive) fees and interest to make repaying a debt more manageable. Lenders may even agree to forgo a percentage of the principal amount if it means they can resolve the debt more quickly.
What Debt Settlement Cannot Do
Secured debts such as mortgage loans, car loans and other types of obligations against which collateral is held are immune from debt settlement. Those creditors will simply take possession of whatever was offered to “secure” the loan, sell it and use the proceeds to recover their capital. Similarly, federal student loans, child support and spousal support obligations cannot be settled with debt relief.
It’s also important to note debt relief won’t improve your credit score while it’s happening. However, as these Freedom Debt Relief reviews demonstrate, it can help consumers get out from under serious debt so that they can then get into a position to rebuild their credit and — by extension — eventually raise their scores.
How Debt Settlement Works
In most cases, a representative at the debt relief company will contact the appropriate individual at the lending institution to offer payment in full — all at once — if they’ll agree to accept a reduced payoff amount. The inference being the debtor is at the end of their rope and if this doesn’t work, the only remaining avenue will be filing for bankruptcy protection.
Creditors know they could well be left holding the short end of the stick in such an instance, as they’ll be forced into a queue with all of the other creditors and take whatever the judge determines the creditor can pay them — if at all. Simply put, it’s a case of a smaller bird in hand being better than not knowing if there will be any birds in the bush at all.
What’s Expected of the Debtor
Upon consulting a relief firm, a debtor’s financial situation is evaluated to determine if settlement is indeed the best route to take. It’s important to note there are a number of other vehicles to consider as well. These include debt consolidation, credit counseling and debt management. The solution you choose will depend on factors like credit score, amount owed and income.
If settlement looks like the best option, debtors often cease making payments directly to creditors and instead deposit the money in an escrow account over which they have complete control. The debt settlement agent will then use those funds to negotiate settlement deals once the funds are sufficient.
Legitimate debt relief firms are paid only when they resolve a debt on behalf of a client. However, debt settlement, while largely effective, isn’t a 100 percent guaranteed solution. Some creditors simply say no. If they do so, the settlement firm doesn’t get paid and debtors can still avail themselves of bankruptcy protection — if there are no other alternatives.
And that, in a nutshell, is how debt relief works. Yes, there are a number of pros and cons to consider, so it’s always a good idea to conduct as much research as possible before making that decision.