The History of Debt Settlement

Debt settlement is a method by which consumers with overwhelming amounts of unsecured debt (such as that incurred through non-collateral loans like credit cards or retail store cards, as opposed to mortgages or car loans) can negotiate a reduced balance with their creditors, providing debt relief. In return for lowering the total amount owed, sometimes by as much as 60 or 70%, creditors would then usually receive either a lump sum or an agreement on the part of the debtor to commit to a repayment plan.

Many would say that this makes good financial sense for both the credit card company and the defaulted card holder to enter into such an agreement. The creditor generally recoups more money through debt settlement than if the debtor were to file bankruptcy—in which case the debt would remain unpaid. Other methods of debt collection, such as selling the debt for pennies on the dollar to a collection agency, are also less satisfactory to creditors.

Also, the debtor usually benefits from debt settlement. Not only would they now be obliged to pay a lower amount than what was originally charged, but they could also avoid the stigma of filing for bankruptcy . Although a dip in their credit rating may result from debt settlement, in the long run the consumer can begin to rebuild his or her credit and regain financial responsibility.

Although this approach—in which a creditor agrees to forgive part of a debt if the other part is paid off—has been around since credit was first extended, it became more widespread in the latter decades of the 20th century. At that time, bank deregulation and looser consumer lending practices, coupled with economic recession, led to financial difficulties for many consumers.

Additionally, in 2005, legislation made it more difficult for individuals to file Chapter 7 bankruptcy—where all debts are erased. Instead, most candidates for bankruptcy would qualify only for Chapter 13, and therefore be obliged to pay back some part of their debts, depending on their ability to pay and IRS guidelines.

Economic ebbs and flows also adversely affect consumers, who may resort to using their credit cards for daily expenses rather than for luxury items, even as they are becoming increasingly unable to pay their current balances. Debt settlement, an alternative to bankruptcy, is poised to become even an more popular option for the millions of consumers who find themselves struggling to pay high amounts of unsecured debt.

Resource: Less.com is an informational website that helps those struggling with unsecured debt. The site features hints and articles about debt settlement and negotiation, and provides a form to put you in contact with debt negotiation specialists that may be able to help reduce your debt by up to 50% or more.