When confronted with bad credit problem, some credit counselors recommend a debt settlement. How does it work? A debt settlement is a negotiation between the borrower and his creditor in order to come up with a different payment term.

With a debt settlement, the borrower will stop submitting his monthly payments to his creditors, instead he will be saving up the money on his settlement account. When enough funds has been saved, that’s the time the borrower will be submitting his payment to his creditors in full. Usually credit counselors or a debt settlement company makes this negotiation on behalf of the borrower.

A debt settlement may reduce a borrower’s debts by as much as 40% or more. The amount of savings you will acquire through debt settlement will depend on your creditor’s response. Thus, a debt settlement agency cannot guarantee the exact amount that you can save on your debts unless the negotiation has already took place. If a debt settlement agency promises to give you 50% of savings from your debts prior to a negotiation, then chances are, your debt settlement company is deceiving you and you should look for another company.

Secured Debts and Settlement

However, not all debts can be settled with a negotiation. If your debts are secured using your property, a debt settlement will not be effective. Your creditors can easily repossess the properties you used as security in case you fail to pay off your debts.

With an unsecured debt, a debt settlement is possible. When borrowers are not able to pay their debts because of bad credit or unfortunate situations such as loss of a job, or a disaster, creditors are usually willing to agree to debt settlement. This is because, if the borrower is forced to file for bankruptcy, creditors often do not receive any payment at all for the borrower’s debts. Thus, creditors often prefer to take a debt settlement rather than deal with bankruptcy.

Negotiation and Debt Settlement

Do you always need a debt settlement company to make a negotiation with your creditors? The answer is no. As a borrower, you can directly meet with your creditors and ask for debt settlement. However, the procedures involved in a debt settlement can be long and complicated.

A typical debt settlement can last for one to three years. Through the help of a debt settlement company, you’ll have greater chances of making your creditors to agree with your proposed settlement. In most cases, creditors will agree to a debt settlement before the borrower decides to file for bankruptcy.

The downside of a debt settlement is that your credit report will be affected. Your lack of payment will still be reflected on your credit report and may have a negative impact on your credit rating. Yes, creditors can report to the major credit bureaus about your lack of payment. Nevertheless, this will only be temporary and your credit can be rebuilt once again after a year or so. If you think about it, the effects of debt settlement are a lot more tolerable than filing for bankruptcy.

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