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The following is a guest post written by David Brown. David is a financial writer for OVLG, a law firm with expertise in Debt Consolidation, Bankruptcy, and Debt Settlement.

The world economy is yet to recover from the overwhelming effect of recession which has driven many families to financial ruin over the past couple of years. Foreclosures are at an all time high, bankruptcies are also on the rise. However, you can come out of the ever mounting, rib rushing burden of debt without filing bankruptcy. If you are considering debt relief programs then you must have heard about debt settlement. It is an effective way of making you debt free within a relatively short period of time. Nonetheless, debt settlement is a rather intricate process and is not a perfect solution either. So let’s probe deeper to understand debt settlement better before you put your right foot forward.

What is debt settlement?

Debt settlement is a debt relief program in which your creditor agrees to accept a reduced sum of money as full payment. A part of your debt is forgiven. Usually, only a lump sum is accepted by the lenders.

• Why should the lender agree to a reduced payment?

Debt settlement is essentially for people who are in a poor financial state, unable to make monthly payments, in short on the verge on bankruptcy. It is explicit that debt settlement is for people who are in the red zone. If you file for bankruptcy then your lenders risk losing everything. Being financially wise people, they will rather settle for a lesser sum than for nothing. Remember that it needs some skillful negotiation on your part to get your creditors convinced that settlement is the best option for them as well as you. If you are not so confident about your own negotiating abilities then better hire a debt settlement company. Apart from dealing with the creditors on your behalf, the settlement company would also handle the intimidating collection calls.

• What are the advantages of debt settlement?

The greatest advantage of debt settlement is, of course, the reduction in the payable amount. Usually you need to pay something around 50% of the outstanding balance. Effective negotiation coupled with critical monetary condition can result in even 70% of the debt being forgiven.

Debt settlement can get you out of debt faster compared to other debt relief programs like debt consolidation or bankruptcy. The whole process should be over by a couple of years if you manage to gather the agreed lump sum and make the payment. You cannot hope to be debt free within two years with any other debt relief program.

Debt settlement has a number of advantages over its most common alternative-bankruptcy. The former indeed looks bad on your credit report but bankruptcy is absolutely fatal to it. Bankruptcy stays on your credit report for 7-10 years depending on whether it is chapter 7 or chapter 13 bankruptcy. “Settled in full” (which comes with debt settlement) statement will make it less difficult for you to get loans in future than having bankruptcy on your credit report. Filing for bankruptcy would also mean that all your financial records will be accessible to everyone. Debt settlement, on the other hand, helps you to maintain anonymity. With bankruptcy you can lose important assets like your home but not so with debt settlement. Finally, bankruptcy is a social and economic stigma and a humiliating experience. Post-bankruptcy life is not easy. Debt settlement is a more dignified way to clear your debts.

• Debt settlement has some disadvantages as well

The main problem with debt settlement is that if your financial condition is truly bad then you will have a hard time gathering the lump sum. It is natural that you will need some time to collect the money; meanwhile the interests will accumulate and add to your debt.

Debt settlement does no good to your credit score. So avoid settling your debt unless you are a bankruptcy candidate.

The money you save by negotiating with your creditors will be taxed ( if the amount forgiven is above $600 ). The more you save , the more you pay in terms of tax.

Hiring the services of debt settlement company can be a costly escape. They charge outrageous fees and don’t give a clear answer about the total money that you need to pay. Thus you are left in the dark which make things even worse. Some companies do take care in educating their clients properly but you need to do proper research to find them out.
It is not always easy to convince the creditors for settlement. They will not easily give up a large part of the money.

• Things to remember while negotiating for debt settlement

Make sure that you do not jump at the first offer that you receive from your lenders. It may not be the best one.

Whatever agreement is reached after negotiation should be written down. Remember that verbal words have no value at all.

Be calm and mentally strong during the negotiation process. If you have iron will and perseverance then you will certainly make a smart negotiation.

Don’t be afraid if your creditors threaten to take you to court. Such a process is too costly and time consuming for them to follow under usual circumstances.

Debt settlement is indeed a good choice for people who are submerged under debt and will not be able to pay the entire amount under any circumstance. However, if you have manageable debts then you may not want to consider this option considering the odds. So thoroughly analyze your economic condition and take the advice of a financial advisor before you decide to opt for debt settlement.