Debt settlement is essentially the practice whereby the debtor negotiates with the creditor to agree on a reduced amount to pay off the money that was owed and considers this as full payment for the loan. This is usually considered as a better alternative to bankruptcy which will not only lower your credit score but stay in your credit report for seven to ten years.
Although debt settlement companies sprout like mushrooms these days and promise to slash down your debt by as much as 65 percent, you don’t need their help. You can settle your debt on your own. Besides, these “debt consolidation” or “debt negotiation” companies have received so much bad press because of their tactics that border on the illegal that it is so much better to go through the debt settlement process yourself.
Before you go ahead and call your creditor to negotiate your loan, you should understand that as a general rule, only unsecured debts can be settled. These are the loans that were extended to you without any attachment to it and relied only on your ability and good faith to pay. Unsecured debts include credit card accounts, bounced checks, personal and student loans, and medical bills. Secured debts like mortgages and auto loans, meanwhile, cannot be settled as the property attached to the loan will simply be repossessed or foreclosed.
Most creditors will not start calling you about your debt until you are already two to three months delayed on your payments. If you want to avoid the hassle of debt settlement and you can cut out other costs to pay off your debt, it is highly-recommended that you pay the loans with the highest interest rate first. This way, should your other, lower-interest accounts, become delinquent and you need to settle them, you will only be contending with a lower amount.
More on Credit Repair through Debt Settlement