Debt Settlement Agreement
Debt settlement is the process of settling or paying debt for a certain sum of money. It is also known as debt arbitration, debt negotiation or credit settlement.
The debtor and creditor often agree to a certain amount, often a reduced amount, to eliminate the entire liability. The process of debt settlement generally applies only to unsecured debts like credit card debt and personal loans.
Debt settlement does not usually occur in secured debts like mortgages because creditors of secured debt can just ultimately seize the asset as payment. Hence, it is unlikely that the creditor will agree to be settled for less.
However, for unsecured debts, creditors often have no such recourse. The creditor’s recourse is to sue the debtor for the amount owed.
If successful, the creditor can collect on the judgment. This process is somewhat tedious and costly. It also takes time and there is really no assurance that the creditor can fully collect on the judgment. This is the reason why unsecured creditors are open to debt settlement offers.
How is it done? There are three ways to effect debt settlement.
First is through the use of a debt settlement company. You make monthly payments to a debt settlement company or to an agent bank which then holds your trust account. A part of your monthly payment is taken as fees for the debt settlement company.
The rest is put into the trust account. In the meantime, you will be advised by the settlement company not to contact and not to make any payment to your creditor.
Generally, the settlement company will settle the amount of your debt for 35%-50% of your balance. The settlement company has leverage to do this because they enter into bulk settlement contracts with creditors.
Often, they already have established long-term business relationship with creditors like credit card companies. This will allow them to process transactions quicker and receive more favorable terms than you doing it on your own.
Your fee to the settlement company is usually specified in your settlement contract and may range from 10% to 75% of the total amount of debt settled.
Another option is to settle your debt on your own. Many people imitate the process done by debt settlement companies and settle their debt on their own.
Normally, you contact the customer service department of your creditor or your credit card company and make the negotiations yourself. It is important to note however that in many instances, the creditor or the credit card company will only deal with you if you are several months behind on payments but you exhibit capability to make lump sum payment.
The advantages of settling and negotiating debt on your own include savings in fees as well as more control over the process. There are disadvantages though. For one, some creditors do not negotiate directly with debtors.
Also, you may be given less favorable settlement terms as compared to the terms granted to settlement companies who settle accounts in bulk. You may even face difficulty getting through decision makers and may encounter long delays in processing your papers and transactions.
Further, every creditor may have different processes and procedures in debt settlement. Unfamiliarity of the process and your lack of knowledge can be quite intimidating and may even lead to making mistakes on your part.
Hence, experts say that when settling debt on your own, you may still need assistance from others.
Your third option is to engage the services of a settlement attorney.
Your debt settlement attorney certainly knows your state laws and the legal issues associated with your debt. He can assist you in dealing with these legal issues. Your attorney can also negotiate with your creditors to reduce your total amount owed making it easier for you to pay off your debt.
Debt Settlement Agreement Letter
Further, your attorney can review and evaluate your debt settlement agreement document. Such agreement letter is the document that confirms in writing what you and your creditor had verbally agreed on to settle your debt.
It can be quite tricky though. Your attorney can review it and make sure the terms are just and will work to your advantage. Your attorney can even help you deal with those annoying phone calls from your creditors and from the collection agency.
The attorney’s fees may be on a per hour basis or may be a fixed fee. The fees will be determined by several factors such as the specific services performed by the attorney, the amount of experience he or she has and your personal circumstances.
There are also lawyers who charge contingent fees, that is, a certain percentage of a certain amount, e.g. the amount of debt settled or the amount that you saved in the process. Experts suggest that should you hire a lawyer; you have to make sure that fess for the legal services are indicated in the contract so you wouldn’t be surprised when you will have to make payment.