For most of borrowers, debts are never easy to pay back. The ever increasing interest on these debts decreases the chances of getting rid of them. This type of situation can be faced either by individuals or different types of companies (e.g. those offering PRO services in Dubai or consultancy in London). In order to avoid this situation, both creditors and debtors are willing to reach a solution which is satisfactory for both. One such solution where creditors can get most of their money, and debtors get rid of their financial obligation by spending less than the real amount is the debt settlement.
In this type of settlement, a creditor agrees to accept less than the total debt amount in response to full payment by debtor at once or in definite periods. This usually happens when it becomes impossible or very difficult for borrowers to payback their loans. In order to avoid bankruptcy or sue, borrowers communicate with creditors through negotiators in order to settle these debts on the amounts that are possible for borrowers to pay back.
If creditors agree for this settlement, then the debt will be paid on new conditions. Usually creditors accept such settlement when they are aware that borrowers are unable to pay debt and want to avoid lengthy legal process. This type of negotiations can only be done on debt-credit cards, personal loans and medical bills. This settlement is not possible for utility bills, rent, mortgage etc.
For this whole process to work efficiently, debt settlement companies play very important role. In fact, these are the companies that convince creditors to accept the debt settlement instead of going for any legal process against debtors. Usually this type of strategy works if you have several late payments and their increase interest and fee is more than the amount you can possibly pay. The debt settlement company has to ensure the creditors that you are unable to pay such high amount and the safest option for both parties (lenders and borrowers) is to accept debt settlement.
Important points to consider:
Though, this seems best situation for debtors in the scenario they are unable to pay their debts, but following points should be kept in mind in order to understand few risks involved in the process.
- There is no guarantee that debt settlement companies will be able to get desirable results for everyone. Sometimes, creditors may not be ready to negotiate with them at all. On other occasions, they may only settle to reduce very little remaining debt. In this case, this settlement will be of less significance as you might have to pay almost same amount of moneydue to addition of fee that will be paid to the negotiating company.
- A debt settlement company may charge according to either percentage of settled debt or the percentage of eliminated debt. You should take a close look at the best option according to your situation.
- You will also be required to pay some extra fees and taxes for reaching this agreement. Setup fee, monthly fee and income tax (forgiven debt is taken as income in several countries) are few such examples.
- It is mandatory for you to pay the settled amount according to the agreement. Failing in doing so will result in various penalties and rise in interest. This situation will nullify any advantage of debt settlement.
Mona is a content writer and business consultant in a Dubai-based consultancy firm, Riz& Mona Consultancy. She has 6 years of working experience. During her career, she has proved her expertise by writing for various business topics including debit & credit, banking, trade, taxation, small business, finance, investment, etc.