Debt settlement is a term used to refer to a procedural approach of debt reduction. During this process, the debtor and the creditor negotiate a potentially huge amount of debt and reduce it to a balance that is considerable as full payment. Other names used to refer to this process are credit settlement, debt arbitration and debt negotiation.
The basics of settling a debt require the negotiation of the debt to a lesser amount in a professional manner between the creditor and the debtor. Basically, the creditor will require a lump sum amount before reaching a full debt settlement. This can be advantageous to the debtor because he may be accustomed to pay even less than a half of the actual full amount that he owed the creditor. The process is considered successful only when the creditor agrees to the amount that the debtor is ready to offer.
Not all types of debts can be settled, the examples of debts that can be settled includes only the unsecured debts like store credit bills and credit cards among others. Secured debts like real estates, student loans and mortgages cannot be settled. The settlement of a debt can be professional or non-professional depending on your terms of agreement.
Professional settlements always involve a debt consolidation company and may also involve a third party trust account where the money for the settlement will be accumulated before its paid to the creditor.
The debtor obviously takes the fat end of the pie in case of any settlement because he will be paying less than the actual debt he owes the creditor. However, there are always some disadvantages associated with this process. For one, the debtor must be ready with a lump sum amount to settle the debt completely as soon as the arbitration is complete. The creditor might also decide report it in your credit report as a settled debt and exposes you to other companies as a person who does not pay the full debt. Therefore, all factors must be considered before deciding on debt settlement.