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Credit Card Debt Settlement Can be a Viable Alternative to Bankruptcy

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When credit card balances begin piling up and monthly payments become hard to handle, debt settlement can be a viable way to avoid succumbing to bankruptcy. Debt settlement companies offer a solution to mounting debt by enabling consumers to consolidate outstanding balances and pay back a sum that is less than what they actually owe.

What is Debt Settlement?

Debt settlement is a process in which you can negotiate to pay back the money you owe under different terms than what you and your creditors originally agreed upon. This can mean settling the debt on an extended timetable, repaying it more quickly, or paying back only part of the money with the stipulation that creditors will consider the debt to be paid in full.

It might sound too good to be true, but creditors do have a sound motivation for agreeing to take less money than they are actually owed or to consider longer payment terms. While a financially struggling consumer is anxious to reduce their debt and consolidate payments, a credit card company or other creditor is eager to receive at least some portion of their money, rather than risking that the debtor will declare bankruptcy and pay back nothing at all.

While it might seem like the process is primarily to the consumer's benefit, credit card debt settlement can be a big help to companies like Visa and MasterCard by saving them from taking a complete loss on an account.

Debt Settlement Companies

Also known as debt negotiation, the debt settlement process is in essence just a renegotiation of the terms - and amount - of a debt. Although it is possible for a consumer to perform this negotiation on their own behalf, credit card companies typically make it very difficult for an individual to arrange his or her own debt settlement agreement. Most creditors will only discuss debt settlement directly with an account holder when they have defaulted on several months of payments.

Debt settlement companies are more equipped to reach a mutually beneficial agreement. They can usually "buy" credit card debt for between 20% and 50% of the original amount, and can charge a customer using their services anywhere from 30% to 75% of the debt's original value. This kind of service is said to cut debt in half, although the total amount charged to the debtor can be more or less than that. Debt settlement companies can also help people by consolidating multiple debts.

Debt settlement can be used to negotiate credit card loans, unsecured personal loans, and personal lines of credit, but it cannot be used for mortgages or other secured loans, government loans, payday loans, student loans, rent, taxes, alimony, or any debts involved in a pending lawsuit. The outstanding amount of the debt generally has to be at least $5,000 and less than $75,000 to be handled by a debt settlement company.

Cost and Benefits of Debt Settlement Services

For some people, debt settlement provides welcome relief and helps them get out of a bad financial situation with their dignity intact. It is most helpful to people who have a steady income and who fully intend to pay back their debts, but may not be able to do so as quickly as creditors demand. Debt settlement services can help to ward off bankruptcy and stop calls from collection agencies.

For others, debt settlement may not be the ideal solution. Similar to declaring bankruptcy, the process can leave a mark on personal credit reports, potentially resulting in a lower credit rating. Credit card accounts paid by debt settlement companies may be marked as having been settled for less than the full amount, rather than paid, and this can make it more difficult to secure other loans or a mortgage in the future. Some debt settlement companies can charge fees before, during, and after arranging an agreement, and it can be a challenge to get an accurate estimate of those fees beforehand.

When creditors and collection agencies come knocking, the debt settlement process is preferable to bankruptcy. Even so, it should not be undertaken without a full understanding of the impact on your credit rating and the costs that may be incurred by using a debt settlement company.