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    What is Debt Settlement?

    Debt settlement is a non-bankruptcy debt resolution method which essentially involves the negotiation of debt, with individual creditors, and the agreement to make a single reduced lump sum payment amount to satisfy the outstanding balance owed to the individual creditor. Essentially, the individual creditor accepts a single lump sum amount, which is less than what is owed, and in exchange the creditor forgives the remaining (unpaid) debt owed. In many ways, debt settlement is the non-bankruptcy equivalent of the Chapter 7 bankruptcy, but rather than receiving a Court order discharging debt, debt settlement requires the cash payment of lump sum negotiated and reduced amounts. 
    Here is an example to try to illustrate how debt settlement can work. Creditor A is owed $10,000 by Debtor for credit card debt. Debtor hires Lawyer to negotiate the debt owed to Creditor A. After negotiation Creditor A agrees to accept a lump sum payment $4,000.00 as satisfaction of the entire $10,000.00 debt. Debtor and Creditor A sign an agreement (called an accord and satisfaction) and Debtor pays Creditor A $4,000.00. Upon payment of the $4,000.00, Creditor A considers the debt satisfied by Debtor. 
    As you can see, debt settlement is definitely not for everyone, and is mainly for a select few borrowers. At its best, debt settlement can potentially reduce the amount of debt owed by as much as +/-70%. Unfortunately, Debt Settlement generally requires cash reserves equal to at least half of the total debts owed. In the example above, Debtor would have needed $5,000.00 in cash in order to start settlement talks with Creditor A (and eventually needed $4,000 cash to settle the debt). Debt settlement can be a great option for those with minimal debts (say $3,000.00-$5,000.00), minimal creditors (1-3), and/or borrowers who have come into “extra” money unexpectedly and who wish to lump sum settlements to settle their debts. 

    The Drawbacks of Debt Settlement:

    Unfortunately, creditors do not generally enter into a debt settlement only to accept monthly payments on the “settled” amount, as this does not benefit the creditor whatsoever. In fact, creditors generally will not even discuss debt settlement as long as the borrower is current on their payments. Often, a borrower who is current on monthly payments, must negatively impact their own credit scores by not making several monthly payments in order to have a better chance at negotiating a debt settlement.  Another factor which can impact a debt settlement is the borrower’s assets. The more assets a borrower has, the less likely their creditors are to negotiate and settle that debt given the creditor can try to go after the borrowers assets (liens, bank levies, other attachments, etc…).
    Just as with Debt Consolidation, debt settlement is entirely voluntary, and some creditors will be more open to negotiation/settlement than other creditors. The general rule of thumb is the more creditors a borrower has, the longer a debt settlement can take, and the less likely it will work for all of the borrowers creditors. Unfortunately, there is no guarantee that all creditors will agree to settle, meaning one could end up making lump sum payments to settle certain debts, only to be stuck with remaining debts that could not be negotiated/settled.