- Debt settlement is often the only affordable option available to avoid filing for bankruptcy
- Unlike credit counseling, which relies on interest rate "concessions" dictated by the credit card companies, each debt enrolled in a debt settlement program is negotiated individually.
The Benefits of Debt Settlement Programs
In a debt settlement program, there are no pre-arranged settlement terms with creditors, and neither the consumer nor the debt settlement company makes monthly payments to creditors during the plan. Instead, the consumer pays an amount into a special savings account each month. As the balance in this account grows, the debt settlement company (or the consumers themselves) will open negotiations with the creditors to find an amount the creditor will agree to accept as a final settlement for the account. As we will see later, frequently the settlement amount is 50% of the account’s balance, although this varies widely depending on credit issuer and consumer. The debt settlement company’s fees vary by firm and philosophy, with some charging approximately 20-25% of debt enrolled and others charging a percent of savings. (More on this later.)
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Unlike credit counseling, which relies on interest rate “concessions” dictated by the credit card companies, each debt enrolled in a debt settlement program is negotiated individually, allowing settlement firms to tailor negotiations to each client’s circumstances. For example, a settlement company may push for a much lower settlement for someone who has been laid off or who is retired. Another benefit of debt settlement firms is the fact that they are paid directly and solely from the consumer and collect no fees or Fair Share distributions from creditors, thereby avoiding the concerns about conflict of interests seen in the credit counseling industry. A debt settlement firm operates solely as a consumer advocate.