|
What is Debt Settlement?
Debt settlement is a process in which an individual reaches an agreement with creditors for a single payoff which is less than the full debt amount. This is a little more complex than just the negotiating that a consolidator may do with creditors or than an individual debtor will do with his own creditors. Debt settlement is a more “legal” process, and a lawyer will generally be needed to consummate the agreements and documents involved.
Purpose of Debt Settlement
The goal of debt settlement is to provide debt relief to individuals who are so deep in the hole they cannot possibly pay what is owed to various creditors, even to the IRS. It is a legal process rather than a quasi-legal negotiation, and formal legal documents specifying the agreements reached in each debt situation are prepared and signed by all parties.
The steps in debt settlement involve the following:
- The individual(s) realize they are “drowning” and know that they cannot possibly meet their debt obligations.
- A lawyer is contacted and a meeting scheduled. At this meeting, the debtors need to be totally honest, providing the attorney with lists of all assets and debts, and total monthly income.
- It will be the attorney’s job to devise a plan of action, taking into account what assets can be liquidated to help in the payment of the settlement agreement.
- The attorney will contact each creditor, explaining the debtor’s situation and explaining what assets are available for repayment. Sometimes these asset may include a loan that is obtained to pay the settlement costs and the attorney’s fees.
- The attorney reaches an agreement with each creditor, and the documents are prepared. The creditor and debtor both sign the documents, and they become legally binding on both parties.
Effect on Credit Rating
Even though creditors may have agreed to a settlement, they will not report to the credit bureaus that the debt has been paid “as agreed.” In these instances, it will be clearly stated on the report that the debt was paid through a settlement and was for an amount less than the actual debt. This will negatively affect the debtor’s credit report, and it will be difficult to get credit again without paying exorbitant interest rates. But it is important to rep-establish some sort of credit history as quickly as possible. The best recommendation is to get a secured credit card, charge a small amount each month and pay off the entire amount when the bill comes. Eventually, other creditors will offer credit, and within a few years, the credit rating will begin to improve steadily.
Related Articles
Opt for Sensitive
Debt Consolidation
|
|
|
|
|
