After the recent financial upheaval, almost all individuals and families are not being able to manage their finances and are incessantly falling into debt. When these people are drowning under the sea of outstanding debt and looking for a way to come out of it, they can pursue debt settlement for clearing their debt. But before considering the option to wipe off the debt with debt settlement, you must gather some necessary information about it.

What is debt settlement?

Debt settlement, also known as debt arbitration or debt counseling is a process that allows the debtors to negotiate with creditors in order to reduce the pay off amount as well as the interest rate so that the debt becomes affordable to pay. One can negotiate the debt settlement with the creditor on his own or can hire the services of a debt settlement company.

How does a debt settlement company work?

A debt settlement company negotiates with creditors and reduces the pay off amount on your behalf. They also waive off the interest rate and charge-offs to fix your debt at an affordable repayment amount. A debt settlement company can reduce the principal amount of debt by upto 40% to 60% with their excellent negotiating skills.

However, before pursuing debt settlement or hiring the services of a settlement company, you must consider the advantages and disadvantages associated with it.

Advantages of debt settlement:

The biggest advantage of debt settlement is that it relieves you from your overwhelming debt and from the annoying creditor calls.

Another primary advantage is it helps you save hundreds and thousands of dollars by negotiating with creditors and reducing debt by upto 40% to 60%. However, the amount you can save depends on how well you or your settlement company negotiates with creditors.

Debt settlement also makes your monthly payment affordable by reducing the interest rate and waiving off other charges. Therefore, you can pay off your debt more easily and comfortably.

Disadvantages of debt settlement:

Debt settlement may appear on your credit report as “paid as agreed” and not “paid in full”. This affects your credit score and create problem when you take out a loan in future.

So it is advisable to send a letter to the creditors reminding them that you no longer owe any debt to them. Request them to note “paid in full” on your credit report.

Nothing comes free in this world. If you hire the services of a debt settlement company, you will have to pay them an upfront service charge as well as the monthly fees. This can be seen as a disadvantage of debt settlement.

In conclusion, debt settlement is undoubtedly an effective way to clear the debt, but one must consider the option analyzing his fiscal situation.