In simple terms, debt settlement is an agreement between the creditor and debtor where both of them arrive at an amount of money which is reduced from the original debt, and if paid, it is considered to be the full and final payment of the complete debt, thereby clearing the debtor from all kinds of debts. Debt settlement has often been referred to by other names of Debt negotiation, credit settlement or Debt arbitration. However the term should not be confused by the terms of Debt Management and Debt consolidation.
Debt Consolidation and Debt Settlement
When a person is in many kinds of debt that have put him in the situation of inability to pay off any of them, he can take out one loan to pay off all the others and then can pay off the consolidated loan. It often secures an interest rate lower than the cumulative that he might have had to pay otherwise for every other loan put together. One loan sounds more convenient and comparatively hassles free than dealing in many loans and bills all together. With the reduced rates, it becomes much easier to manage the monthly payments.
Debt consolidation is recommended in cases of debts of Credit Cards, since they carry much bigger interest rates. If the debtors can secure the loan amount against collateral of any property, the interest rates dip automatically. Debt settlement comes into play when the person is unable to put together enough money to put p with the monthly payments bill at reduced rates too. The debt settlement companies can get the companies whom the person owes money to reduce the total debt by a certain amount, thereby making the monthly burden on him a little lower. Once the person can pay off the bill, he is free of any debts.
Debt Management and Debt Settlement
In the program which centers on Debt Management, the company counselling your case would work around to reduce the interest rates to help reduce the monthly payment. This directs more funds at clearing the debt than at paying off the interest rates. This process helps the debtor to clear off the debts within a stipulated period of 60 months. A debt management program is a formal agreement between both the parties in question- creditor and debtor. A debt management company would take into account the income and expenditure of the household, before deciding upon the disposable income, which would then be distributed among the creditors.
Debt Settlement stands at a difference from Debt Management. In a debt settlement program, the debt settlement company which is usually a third party processor, hired by the debtor, works on negotiation terms with the creditor and the creditor agrees to reduce the balance of outstanding amount so that the remaining amount becomes easier to pay off. In a debt settlement program, a power of attorney is required to be signed off. All of these programmes could easily be confused with each other. However the choice largely depends on the debtor, the kind of outstanding amount he is looking at, the income and expenditure of the household and the monthly payments which go off into the repayment of the loans.