Debt settlement takes place when a debtor is not able to pay the money he owes the creditor. They, therefore, decide to come up with a lower figure. Once the debtors pay the creditor the amount, the debt will be settled, and this will mean that he will no longer be required to pay the debt in full.
How it works
The debt settlement arrangement typically acts when you have skipped payments or have made too many late payments. Whenever you fail to pay your debt in good time, your credit score will take a tumble.
Therefore, it is recommended that you always pay your debt in good time to avoid getting a bad credit score. You should note that your credit score will determine how much money you will be given in future.
The debt settlement entities usually negotiate with the creditors so that the debtors pay less the amount that they owe them. This is usually on the unsecured debts like the credit cards. Debt settlement is however not an option for some types of loans. For example, if you took a loan a put your house as security, then the company will sell your house once you have been unable to pay your debt.
Debt settlement will only take effect when it is realized that you are not able to pay at all. You will be required to open a settlement account and put some money there monthly. Once the settling company realizes that you have made sufficient deposit for a lump sum, they will negotiate on your behalf with the creator so that you end up paying a smaller amount.
Risks associated with debt settlements
We have risks that are associated with debt settlements. One of the risks is that your credit score will take a hit. You may be put on delinquent accounts if you are not already in one. This is likely to stay on tour credit report for seven years.
Interests and penalties
Another thing that you should note is that the interests and penalties will continue to accrue even with the debt settlement in place. Provided you do not make your payment in time; you will attract late penalty fees. The interest will keep racking up. You should, therefore, pay up immediately.