Los Angeles Debt Settlement Attorneys

How Does Debt Settlement Work?

Debt settlement is a financial strategy in which a debtor negotiates with their creditors to pay off a debt for less than the full amount owed. It is typically pursued by individuals or businesses experiencing significant financial hardship and unable to meet their debt obligations in full. Here's a breakdown of how debt settlement works and its implications:

1. Assessment of Debt: The debtor evaluates their total debt and financial situation to determine if debt settlement is a viable option. This often involves reviewing all outstanding debts, interest rates, and their income and expenses.
2. Hiring a Debt Settlement Company (Optional): Many debtors hire a debt settlement company to negotiate on their behalf. These companies usually charge a fee, either a percentage of the settled debt or a flat fee. It's also possible to negotiate directly with creditors.
3. Negotiation Process: The debtor or the debt settlement company negotiates with creditors to reduce the total amount owed. Creditors may agree to a lower amount if they believe it's the best way to recover part of the debt rather than risking getting nothing if the debtor declares bankruptcy.
4. Accumulating Settlement Funds: The debtor typically stops making regular payments to the creditors and instead makes deposits into a special savings account. These funds will be used to make lump-sum payments to settle the debts once an agreement is reached.
5. Settlement Agreements: Once enough funds are accumulated, the debtor or the settlement company proposes a settlement offer to the creditors. If accepted, the debtor pays the agreed-upon amount, which is usually significantly less than the original debt.
6. Debt Resolution: After the payment is made, the creditor typically considers the debt settled and writes off the remaining balance. The debtor should obtain written confirmation that the debt has been settled.

Pros of Debt Settlement

• Reduction in Debt: The primary benefit is paying less than the full amount owed, which can significantly reduce the financial burden.
• Avoiding Bankruptcy: Debt settlement can be an alternative to bankruptcy, which has more severe long-term impacts on credit.
• Potential for Faster Resolution: Debts may be resolved more quickly than through making minimum payments over many years.

Cons of Debt Settlement

• Credit Impact: Debt settlement can negatively affect the debtor's credit score because it involves not paying the full amount owed and often includes missed payments during the negotiation period.
• Fees: Debt settlement companies charge fees, which can be substantial.
• Tax Implications: The forgiven debt amount may be considered taxable income by the IRS.
• No Guarantees: Creditors are not obligated to accept settlement offers, and some debts may not be eligible for settlement.