Debt settlement is a process of negotiating with creditors to help debtors avoid bankruptcy. The settlement process is based on the fact that a consumer declaring bankruptcy would create a loss for the lender. Settlement serves as the alternative to bankruptcy for consumers. When a debtor declares bankruptcy, the lender loses up to the entire remaining balance of the debt that is owed due to the protection that is provided to the consumer by the bankruptcy. The problem with bankruptcy for the consumer is that it causes a devastating impact on the consumer’s credit rating. The process also involves invasive court proceedings that could be very lengthy. The court also tends to impose stringent restrictions on the financial abilities of the consumer. This restrictions can prevent the consumer from doing certain things. The settlement process on the other hand does not restrict the consumer by a court order. There are no invasive investigation involved in the settlement process like there’s with the bankruptcy procedure. During a settlement, creditors will typically agree to forgive debt by as much as 50% of the remaining balance. The reduction could be counted by the lenders as a tax credit at the end of the year. The tax credit is additionally encourages the lenders to participate in the settlement process. The company that handles the settlement proceedings typically charges a fee that based on a percentage of the amount of debt that is forgiven. The process of settlement seems to have advantages for both parties which includes the reduction of debt and avoidance of bankruptcy for the consumer and the ability to retain revenues that would have been lost through a bankruptcy for the lender in addition to a nice tax credit at the end of the year. The settlement process works quite well when it comes to unsecured debts like credit cards and unsecured personal loans, but the process does not usually apply to debt that is secured by collateral like an automobile loan or a mortgage on a house.
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