Debt Settlement Reduction
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Debt settlement reduction is a method for managing debt that lowers the principal balance, thereby lowering the overall amount of funds owed to creditors - this is at a cost to the debtor's credit rating, so such a decision should not be taken lightly. This form of financial improvement represents a more aggressive approach to lowering financial burdens, often reducing the amount owed by 40-60%, and shortening the time frame for paying off total amounts - often within a 3 month to 3 year time frame. For example, a person may owe a credit card company $10,000, but with reducing and settling, the company may decide that the debtor owes them $3,000 as full payment of the balance, thereby lowering the overall amount by $7,000.
Reducing and settling is an agreement that the consumer helps define regarding payment planning for unsecured loans and credit. The creditors work with debtors and their settlement companies to calculate how much of the total balance that can be paid. Unsecured balances that are covered by debt settlement reductions include credit, gas, and retail store cards, personal loans, utility bills, taxes, medical and hospital bills. Reducing and settling will not cover student loans or secured loans such as mortgage, auto and equity lines of credit.
To qualify for these services, it is necessary to show financial hardship, as creditors will not negotiate lower balances if the debtor's credit shows an ability to pay. Typically, a creditor will consider lowering a balance only when the potential for filing bankruptcy is high. Bankruptcy means a creditor risks getting nothing from the consumer, so lowering the overall balance through a debt settlement reduction is a better deal for them than writing off the balance. It should also be noted that a creditor can still sue for nonpayment, even when a debt settlement reduction has been implemented.
Reducing and settling often involves paying off creditors in lump sum format, and each creditor may have a different approach to payment, so it is necessary to fully understand the terms associated with the settlement negotiated for individual creditors. There may be delays in payment to creditors as the consumer accumulates the total amount needed to pay off a lump sum amount, and debt settlement reductions don't ensure that one's credit rating remains positive. While the debtor saves for the lump sum payment, it is possible to incur fees and non or delinquent payment reports. Debt settlement reductions can lower one's credit rating to a score only slightly higher than bankruptcy, so great care must be taken when considering it as a solution.
There are costs associated with these services, usually as a percentage of either the remaining balances to be paid or the savings incurred. These percentages can range from 8-15% of the total outstanding debt, or 25-33% of the total savings experienced. In addition, the savings realized as the result of debt settlement reduction is taxable by the IRS. Consumers must calculate if the savings experienced are greater than the tax one would pay prior to making a decision for a solving their money problems. "And everyone who was in distress, everyone who was in debt, and everyone who was discontented gathered to him." (1 Samuel 22:2)
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