Debt Settlement Explained

Debt Settlement Explained Without The Hype

By joining a debt settlement, or debt relief program you would be hiring a debt settlement company to negotiate your debt down with each of your creditors. They are called debt settlement companies because the creditors will actually ’settle’ for less than what you owe them, but once you pay them the settled upon amount, your credit report will reflect a zero balance due. The average amount that the creditors will settle for is about 40%. That means that some will settle for less and others will settle for more. It is an average.

The Debt Settlement Company that you choose does make a difference in your negotiated settlements. The length of time that they have been in business will reflect several things. The relationships and reputation that they have established with the Creditors. The experience of their negotiators, and the solidity of their business practices.

The first thing that a company will do is send a Limited Power of Attorney letter to each of your creditors. This letter allows the Settlement Company to act as your agent, speaking with your creditors in your behalf. It also gives permission to your creditors to speak to the Debt Settlement Company as if it were you. Without this letter signed by you, your settlement company can not get or give any information about you to your creditors.

Successful Debt Negotiations

In order for a debt settlement company to successfully negotiate your debt down, you, the consumer, must come up with lump sum payments. To accomplish this your debt settlement company will put you on a payment program, or mandatory savings plan, whereby you will set aside a certain dollar amount each month into either a checking or savings account of your own, or into an escrow account set up by the settlement company. The Limited Power of Attorney letter will go out after you have deposited your first payment.

Most Debt Settlement Companies will put you on a payment plan that could be up to as much as half of what the creditors monthly minimum payments were. This will immediately relieve some of your financial burden.

Each of your debts will be negotiated individually, usually starting with the smallest debt first. The reason they start with the smallest debt first is because many of your creditors are going to be waiting in line, and one creditor is going to be forced to wait the duration of your program. While the creditors are waiting, one of the things that they may do is pull your credit report to see if you are actually settling with creditors you owe less money to. If you started with the higher debt, there would be no indication for quite some time that you are actually participating and settling your debts. Starting with the smallest debt encourages them to sit back and wait their turn.

Debt Settlement Example

If you owe a creditor $1,000 your debt settlement company will have you save $300 – $400 up first. Once you have saved up what the creditor might settle for, then, and only then, can your debt settlement company contact the creditor for negotiations. The reason that you have to save first is because if a creditor is willing to forgive 60% of your debt, they are going to want the rest of the money you owe them in one lump sum, usually within 24 hours.

The money that you will be setting aside for the debt settlement program is a portion of the money that you had been sending to your creditors. If you are not already delinquent with your payments, you will go delinquent in a debt settlement program. You have to be delinquent in your payments because if you are on time, you don’t look like you need help. Your creditors will not even think of negotiating your debt down unless you are late with your payments to them. It’s much the same in the housing industry at this time. No lender is going to offer any help to you unless you are significantly behind on your mortgage.

Next: Is Debt Settlement for Me?

If you have questions or comments, please fill out the form below and I will answer within 24 hours – If you want a phone call, please put your phone number in the message section. ALL INFORMATION IS STRICTLY CONFIDENTIAL AND WILL NEVER BE SOLD OR SHARED!

Don’t forget to anwer the math question below the form!