Should you consider debt settlement?

Suppose you have come to the realization that you have so much debt that you do not see any way to ever pay it off. In fact, it is a hardship for you even to make minimum payments. Many people automatically think they might have to file bankruptcy in this situation. But you do have another option -- debt settlement, also known as debt resolution or debt negotiation.

In the process, a debt resolution company will work to negotiate lower total debt payments on amounts you owe to creditors of unsecured debt. Unsecured debt is not backed by any type of collateral or asset, and includes debt from credit cards, medical expenses and utility bills. The debt resolution process can help you get out of debt, but it does have consequences. Consider the following information before going this route.

1. How debt settlement/resolution works: It is sometimes possible to negotiate directly with your creditors yourself. However, a debt settlement specialist will be able to leverage its relationships with creditors to get you the best deal, and in the most timely way. A good provider will know how much each creditor is willing to settle for, and what terms they will agree to at different points in the collection process. During the settlement process, these creditors agree to forgive part of the debt owed to them. The new amount you owe might be 40 percent to 60 percent of the original balance, so the savings can be significant. In some cases, you may pay the new settled balance over several monthly payments. Or you may pay off the reduced balance in a single lump-sum payment, depending on the terms of the negotiation.

2. The cost of debt settlement/resolution: Debt settlement firms charge consumers a fee for their services. This is generally a percentage of the debt enrolled or a percentage of the debt reduced. Federal Trade Commission (FTC) rules state that fees can be charged only after the firm has successfully negotiated the debt on terms the customer has accepted. To accumulate the funds to pay creditors, you will deposit a certain amount each month into a dedicated account that you own and control. All reputable debt settlement firms will abide by the FTC regulations, and not require any up-front or monthly fees. Fees should only be paid on the basis of results.

3. Pros of debt settlement/resolution: A good debt settlement firm can negotiate significant reductions off the outstanding amount owed on most unsecured debts. This allows you to enroll in a program with a monthly payment amount that is usually significantly less than the minimum payments you had been making to creditors. Also, debt settlement programs often provide better repayment terms than do Chapter 13 bankruptcy filings. Debt settlement does not leave a permanent bankruptcy judgment on your credit record. Because debt settlement reduces your debt load, it is possible to resolve all debt within two to four years.

4. Drawbacks of debt settlement/resolution: This is a serious process with some drawbacks that go along with being in severe debt. While enrolled in a debt settlement program, you are delinquent on the enrolled debts, which will appear on your credit report. In addition, late fees and interest will continue to add up. Collection agencies or creditors may still call you to pursue payment. Some creditors might even choose to take legal action for unpaid accounts. Your debt settlement provider should be able to support you through this process while negotiating on your behalf.

5. Finding a debt settlement/resolution provider: Do your research before hiring a provider. The Federal Trade Commission's information for consumers notes two red flags. Companies should not charge fees before settling debts, or guarantee they can do away with all unsecured debt. Reputable companies will be upfront about their fees. They also will counsel you on the possible challenges of the process, and tell you how long the process might take before they make offers to each creditor.

As you can see, debt settlement, or debt resolution, is a serious option for people with serious debt. For those who qualify, it can provide significant benefits: lowering monthly outlays, reducing debt and allowing you to resolve your unsecured debts in two to four years. Candidates for debt settlement usually have more than $10,000 in unsecured debt. They are struggling to make minimum payments, and might be considering filing for bankruptcy protection. If you are not sure whether debt settlement is the right option for you, contact a reputable debt settlement advisor to learn more. One place to begin is with the American Fair Credit Council, which enforces a strict code of conduct for its members, and only accepts as members companies who comply with the FTC regulations for the industry.