The Maze of Debt Relief Options

Debt Settlement is an agreement between a debtor and a creditor to fully satisfy a debt for a reduced payoff amount. A debt settlement is usually reached when a debtor is unable to fully meet their debt obligations due to financial hardships and attempts by the creditor to collect on the debt have failed.

The creditor agrees to cancel part of the debt and accept the remaining sum as full repayment. Debt settlement is also called debt negotiation. Technically speaking, a debt settlement is the agreement while debt negotiation is the process through which both parties reach that agreement.

Consumers who use debt settlement are those who are experiencing legitimate financial hardships. Normally, only unsecured debts, like credit card and medical debts, can be negotiated for settlement. Secured debts, like home and car loans, cannot be negotiated because the creditor usually can repossess the item purchased with the credit issued to the borrower.

Debt settlement programs are provided by third party debt resolution firms who set up payment plans, and then negotiate settlements on behalf of the consumer. As a concept, lenders have been practicing debt settlement thousands of years. However, the business of debt settlement became prominent in America during the late 1980s and early 1990s when bank deregulation, which loosened consumer lending practices, followed by an economic recession placed consumers in financial hardships.

With charge-offs increasing, banks established debt settlement departments staffed with personnel who were authorized to negotiate with defaulted cardholders to reduce the outstanding balances in hopes to recover funds that would otherwise be lost if the cardholder filed for Chapter 7 bankruptcy.

In the 1990s, companies were established to negotiate debt settlements with creditors on the debtors behalf. Unlike the creditor supported consumer credit counseling industry, debt settlement companies are usually companies that charge fees for their debt settlement related services. Another stark difference is that debt settlement companies do not negotiate reduction in interest rates, distribute monthly payments to creditors or report enrollment to credit bureaus (as a managed account). Instead, debt settlement companies negotiate reduction of the total outstanding balance of each debt in exchange for a lump-sum payoff and the account is reported as "settled in full".

To support the debt settlement industry and develop standards and best practices, practitioners established the United States Organization for Bankruptcy Alternatives (USOBA) in 2004 and in 2005, industry leaders established The Association of Settlement Companies. (TASC) TASC's goals are to promote good practice in the debt settlement industry, protect the interests of consumer debtors, and lobby on behalf of debt settlement companies on the federal and state level.

For the average consumer, it can be a rather daunting task of sorting through the numerous settlement and negotiation services companies nationwide. While there are many reputable companies offering settlement services, there are questions you should consider when choosing a company that meets your needs. (from the TASC website)

Company Credentials

Are they a member of a national industry trade association or other accreditation agency? This is one of the most important items to consider when choosing a company to work on your behalf. Many settlement companies today operate independently and without a system of checks and balances. Since many states have few requirements for settlement companies to follow, be certain to look for a company who holds themselves accountable to industry standards maintained through an industry accreditation process.

Holding Accounts

Does the debt settlement company hold client settlement monies? Debt settlement companies should never offer to hold your money in a trust account controlled by the company. Instead, the monies saved for future negotiation should either be in the consumer's own private savings account or in a third party bank FDIC insured account. You should always maintain direct control of the money

Customer Service

What can you tell me about the quality of your customer service? The settlement process can take between two to four years to be completed. This is a trying period for the consumer faced with aggressive creditors. A solid relationship with clear communications directly with the company is instrumental to completing the program successfully and stress free. Ask about customer service training, hours of operation and any affiliation or awards the company might have earned.

Creditor Management

What do you do to help with aggressive creditors? Debt Negotiation clients are likely to experience aggressive creditors using threatening collections tactics. Consumers should require that either the creditors be notified through a "ceased and desist" letter or that a creditor harassment service be included with their debt settlement program.

Consumer Education

Do you provide any educational services or materials?

Debt Negotiation is not just about saving money and becoming debt free. It is about learning proper financial management so that the consumer is not faced with the same financial situation in the future. Debt Settlement Companies should be offering financial education services either through online education, print or in class training.

In the coming days we will explore the other debt relief options available to consumers and compare the differences with a debt settlement program. We invite you to do your due diligence and see for yourself that debt settlement is the way to go when seeking a true debt relief option.