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Debt Relief Pros and Cons
Because of the economic downturn, the need for debt relief through debt settlement is greater than in recent memory. But first of all, what is debt settlement and what are the pros and cons?
Debt settlement is an effective debt relief alternative in paying off unsecure debt such as credit cards, medical bills, and collection accounts. It is NOT a debt relief solution for secure loans such as auto loans, home loans, government student loans, or taxes. With debt settlement, Chapter 7 bankruptcy is avoided because the debt settlement agency is able to negotiate down the unsecure debt by as much as 50-60%. This is done by settling the debt in bulk, with thousands of dollars of multiple consumer accounts at one time. Because the debt settlement agency represents many credit accounts, there is more room for negotiating down the balances due with the creditors.
For the consumer, debt relief is advantageous because the debt settlement agency is able to set up monthly payments that are typically half of what the consumer is currently expected to pay on their minimum payments. Plus, the consumer will be debt free in typically just 2-3 years! One con of debt settlement is that the creditor will show the consumer's account as late until the account is settled. But, once the account is negotiated and paid, the creditor will show the account as "paid" or "settled". Many times the debt settlement agency will even negotiate to have the creditor erase any derogatory marks while the consumer was in the program. Either way this is far better than a bankruptcy that stays on one's credit report for 10 years!
So why would creditors settle for such low pay-offs? First, they will recover only 7-15% of the amount due if they turn a past due account over to a collection agency. That's right! The collection agency gets all the rest. With debt settlement, the creditor recovers 40-50%! Second, if the consumer does file bankruptcy, the creditor will collect nothing of the amount owed. Debt relief through debt settlement is a win-win situation for both creditor and consumer.