If you're unable to pay your bills, consider debt settlement. This entails negotiating a deal with your creditors to pay a part of the debt. In return, they'd wipe your slate clean of the remaining balance owed.

Many people reach a point in their lives when they can't pay off their debts. Short of declaring bankruptcy, they have one last choice: debt settlement. In this process, the debtor strikes a deal with the creditor wherein he agrees to pay a portion of the debt in return for having the balance forgiven. This generous program is increasingly popular with both creditors and consumers alike.

How debt settlement works

If you find yourself in this situation, sit down with your creditor and try to reach a mutually beneficial agreement. Perhaps you can pay back the debt a little at a time, or pay a percentage of the debt in one lump sum. For example, if you owe $10,000, and agree to pay back $7,000, the creditor would cancel the remainder of the debt.

While this kind of arrangement is in your best interest, it also benefits the creditor. If your only other courses of action are to declare bankruptcy or duck the creditor and bill collectors, the creditor could wind up with nothing at all. Even when companies hire bill collectors, they generally have to pay a hefty fee for their services. Negotiating directly with the consumer is often a more profitable approach for creditors.

Where to go

Debt settlement programs are often provided by third party debt resolution firms. They can set up payment plans, negotiate settlements, and act as a go-between or mediator between consumers and creditors. Typically, they can lower monthly payment contributions by approximately half. This allows consumers to get free of their debts in a relatively short period of time. Creditors are more likely to agree to a debt settlement when the borrower can prove a legitimate financial hardship such as illness, death of a spouse, or sudden job loss.

Debt settlement alternatives

One way to avoid debt settlement is through debt consolidation. In this arrangement, you would use a debt consolidation loan to lower the amount of interest you pay. You wouldn't be asking for partial forgiveness of the debts. Let's suppose that your credit card balances are averaging interest rates of 16 percent. If you've accumulated equity in your home, you could take a home equity loan at an interest rate of 8 percent. These funds would pay off your expensive credit card bills. You'd still need to pay back the home equity loan, of course, but you'd save 8 percent interest, effectively reducing your rate by half. You would also significantly lower your monthly bills while "consolidating" all your loans into one easy-to-manage payment.

If you find yourself in the unenviable position of not being able to meet your bills, don't despair. A debt settlement or debt consolidation loan can help you get back on your feet again.

Published on November 24, 2008