- What is Debt Consolidation?
Learn how debt consolidation works to reduce interest rates and save money.
- What Can Be Consolidated?
Types of high-interest debts commonly used.
- What is Debt Settlement?
Often confused with, but significantly different than consolidating.
- What Debts Can Be Settled?
Learn what kind of creditors that will often settle for less.
- How Do Bankruptcies Work?
How Chapter 7 and Chapter 13 bankruptcies work, and the aftermath on your credit report.
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What Is Debt Settlement & Negotiation?
When a debtor has serious financial difficulties and the creditor becomes concerned about receiving payment at all, both parties may choose to make an agreement to settle the debt at a lesser cost. This is referred to as debt settlement, because the creditor is settling for a lesser amount than what is fully owed. This can also be known as debt negotiation as the lender will negotiate with the debtor. The lender will come to you to negotiate this debt. If you go to them, they will more then likely just say no.The creditor and debtor both have their reasons for settling the debt at a reduced price:
The person in debt is trying to fix their financial woes without being forced to declare bankruptcy. This happens when they are unable to find a debt consolidation or credit counselling business to pay off what's owed, debt settlement is much less damning to their long-term credit than going bankrupt; and because the debt is paid back, harrassment for payment from the money lender will come to a hault.
For the creditor, a debt settlement proposal means they will usually be given a greater amount than they would were the debtor required to declare bankruptcy, and can actually save them money over using collection agencies and/or solicitors fighting to pull together the full amount. It also means they'll get payment sooner rather then later.
Many debt management firms use a mix of debt settlement and consolidation efforts whenever viable, lowering individual debts in advance of conslidating them into one debt at a lower interest rate.