Debt settlement has become a way for the consumer to unburden themselves from their unsecured credit card debt. The consumer in the prior years used their credit card as a method to purchase everything from retail, groceries, airline tickets and everyday living expenses. However, when the economic climate changed the consumer was not longer able to keep up with their minimum monthly credit card payment. The consumer started to face undo financial hardship caused by loss of job, divorce, death or a medical emergency.
The consumer needed a way out of their current financial situation. The average consumer does not want to totally walk away from their obligations but just needs a method by which to handle their situation. In some cases, the loss of a job will be corrected and the consumer will be able to get back on track. It is during this time, that the consumer is seeking some type of financial relief from their lenders.
One of the ways to get relief is to use a debt settlement program. This program is not an easy fix or an overnight miracle for the consumer, this program can take between 12 to 48 months depending on the size of your debt. Basically the debt settlement program works with the consumer to establish a payment plan by which monies are placed monthly into a “trust/escrow account.” When a less half of the monies owed to a lender on your lowest balance credit card, then the debt settlement expert will begin to negotiate on the consumer’s behalf. The monthly payments into the account are normally much less than the current minimum monthly credit card payments. The debt settlement company is usually able to negotiate a 40 to 50 percent reduction of the consumer’s debt.
As a consumer you are asking why, would a lender expect this type of negotiation? The underlying answer is the lenders are more willing to take something against the outstanding debt than to have the consumer file bankruptcy. Normally, when a consumer files bankruptcy, the secured creditors are pay first from the consumer’s assets and the unsecured creditors receive little to nothing from the consumer. It is a win-win for everyone, the consumer and the lender.
There are some drawbacks to the consumer when using a debt settlement program. Those issue maybe 1) taxable income on the forgiven debt and 2) lower credit score. But the consumer needs to remember that your credit score may already be hurt because you are late on payments, over limit and have high balances. You can work on improving your score as the debts are settled.
