Understanding Financial Considerations

Posted on: 14 August 2019

The crush of owing a lot of money to multiple creditors can leave you feeling at a loss for what to do. There are organizations that offer debt settlement services, but it's important to understand what they can and cannot do for you. If you're curious about the debt settlement process, here are three things you need to know.

Understand Their Business Model

Settling debt has become an industry in America, and there are at least three common business models. The first business model is credit counseling, and it is designed to represent the interests of the creditors. Second, there is a model that involves paying fees upfront, and it is considered sketchy at best. Finally, there is negotiating debts down on behalf of clients, and this is the form of debt settlement services that is preferred. One of the main reasons the negotiated settlement process is preferred is that the company you hire is there only to represent your interests. In the counseling model, they may accept payments from the credit agencies or your creditors. The settlement model removes this chance of a conflict of interests.

Stopping the Phone Calls and Bills

It's worth noting that debt settlement firms cannot make harassing phone calls or letters stop until an agreement has been reached. The only way to stop harassment before settling debt is to get a court order, and that's the domain of a bankruptcy lawyer. If you're not at the point that you can or want to take the dramatic step of declaring bankruptcy, a settlement is likely to be one of your better options.

How Does It Work?

In the corporate world, it's common for creditors to take a so-called "haircut" on debt they're owed by other companies. They do this for a variety of reasons, including needing capital now and not wanting to spend money only to collect a portion of what they're owed.

The term haircut arises from the notion that the barber will take a little bit off the top. You're not going to pay pennies on the dollar. However, you may be able to settle your debts for something like 85 cents on the dollar. The creditor gets to collect a healthy portion of what they're owed, and you have the opportunity to make your bill manageable. You'll avoid having a bankruptcy appear on your credit record, although there will be some rebuilding to do with your credit score. Work with a debt settlement professional to learn more.