Debt Settlement FAQs

How it works

Essentially, the debt settlement company negotiates upon the borrowers’ behalf with creditors to reduce the overall debts in exchange for an agreement upon regular payments to be made. Only credit card debts can be handled, not student loans, auto financing or mortgages. For the debtor, this makes obvious sense – they avoid the stigma and intrusive court-mandated controls of bankruptcy while still lowering, sometimes by more than 50%, their debt balances. Whereas, for the creditor, they regain trust that the borrower intends to pay back what he can of the loans and not file bankruptcy (in which case, the creditor risks losing all monies owed).

There are obvious drawbacks – credit reports will show evidence of debt settlements and the associated FICO scores will be lowered as a result. There’s always the possibility of lawsuit whenever debts lay unpaid. Since few creditors wish to push borrowers toward bankruptcy – and the potential of governmental protection against all debts. In addition, the specific debts of the borrowers themselves affect the success of negotiations. Tax liens or domestic judgments, for reasons that should be clear, remain unaffected by attempts at settlement. Student loans, even those not federally subsidized, have been granted special powers by recent legislation to attach bank accounts without possibility of Chapter 7 bankruptcy protection. Also, some individual creditors, including Discover Card, for example, tend to have an aggressive resistance against negotiations.