Is your debt level so high that it is giving sleepless nights? Are you desperate and need a solution to pay off your debt? Then this article provides answer to your question with information on how to settle your debt, as well as the main advantages and disadvantages.

What is Debt Settlement?

Settling your debt means to make full payment to an account. There could be different types of debt:

• Student loan debt
• Credit card debt
• Personal loan debt
• Medical bill debt
• Utility debt
• etc..

These definitions you can get an idea of what debt settlement will consist of.

What does debt settlement consist of?

Debt settlement allows the creditor to agree to settle the debt for an amount less than the total amount owed. In other words, the debtor will pay less than the amount actually owed, and the lender does not ask for the money owed.

That is why negotiation between the two is very important. After the corresponding negotiation, a settlement agreement is reached, in which both agree to settle the remaining balance on the account in exchange for a partial payment.

Process to settle your debt

Depending on who initiates this process and how they approach it, the way debt settlement works may vary. The basic ways most common among the debt consolidation population are divided into four:

1. There are those who choose to settle debts on their own.
2. Another option is to contact a debt settlement company such as CuraDebt to set up a debt settlement program and negotiate on your behalf.
3. You can also work with a state-licensed debt settlement attorney.
4. Or, if you prefer, you can respond to a debt settlement letter from a debt collector.

What is a debt settlement program?

Following is the general process involved in a debt settlement:

• First, it is important that you have funds available to make a settlement offer. Then the company will set up an account in which small amounts will be set aside monthly in an account created for that purpose.
• Secondly, you or your intermediary will contact the creditor to make a settlement offer. At this point the most important negotiation will begin.
• Don’t worry if you don’t reach an agreement on the first try. But you will have to go back and forth a lot until you reach a final solution that is agreed upon by both.
• Once the agreement is in place, payment will take place. You as the debtor will be the one making the payment as a single lump sum.
• Once the creditors, lenders or collectors have received the funds, they will subtract the remaining balance from your account.
• That account will be closed and they will report to the credit bureaus.

Advantages and Disadvantages of Debt Settlement

It is important for you to know both the pros and cons of settling your debts. Because what at first glance seems like a simple and too good option, can make your situation even worse and have negative repercussions.

So let’s start with the main drawbacks of debt settlement:

• When you hire an intermediary, an account will be created in which monthly monetary funds will be deposited. But of course, the payment to the lender will be made when an agreement has been reached and the agreed amount of money is in hand. What is the problem? During that time late fees and other charges will accumulate and have a negative effect on your credit.
• In the event that negotiations with the creditor fail, you will be worse off than when you started this process.
• You will have to pay the debt settlement company. These companies can be very expensive.
• In case you cancel a debt which is more than a certain amount, it will be considered as taxable income that you will have to report in your tax return.
• It can be a long procedure, it can take up to three years to pay off your debts.
• In the event that you settle your debts, a negative check mark is created on your credit report that will remain for certain number of years.

Advantages of Paying off your Debt:

• Undoubtedly the main advantage is that it allows you to settle your debts for a smaller amount than what you owe.
• This could save you from an extreme situation such as bankruptcy.
• By settling your debts you will get rid of all those calls and lawsuits that only complicated your life and reminded you daily of the financial situation you were in.
• By getting rid of your debts your life will relax, you will begin to have more financial freedom, you will be able to focus more on your work, family, leisure and above all on your health.
• It is important that you take into account the consequences that debt settlement can have. That is why before adopting one of these strategies you should make a thorough analysis of your debts, expenses and income in order to make the right decision.

Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected].