Types of Debt Settlements

2007-07-24 08:31:47

( Financial )



Inability to Service Debt

As long as you have a steady source of income such as a job or business, you would normally be able to service your credit card bills or other debts on time until your lenders are fully paid.

Unfortunately, you are not always assured of a steady and sufficient source of funds to repay your debts and other expenses. Loss of a job, a co-earning spouse, or even an unexpected expense such as hospitalization or litigation can do much to upset your financial position and get you into a rut where you owe more than you can possibly pay for. Many people often get buried deep into debt simply because they lack the discipline to control their spending.

Ways of Getting Out of Debt

A simple way is to consolidate your debt obligations into one account with one lender only. By doing so, you can settle almost all your debts with other lenders, and just maintain one consolidated loan with only one creditor. Consolidation of student loans and other obligations can even reduce the overall cost of borrowing for you, since the new consolidated loan might charge you lower interest rates.

You can arrange for a modified payment or debt restructuring plan with your lender. Your lender can extend the payment period, charge a lower interest rate, or waive a portion of your balance. The goal is to clean up your debt in the most reasonable way possible, in consideration of your current financial hardship.

Ultimately, you can also file for bankruptcy wherein your creditors will claim almost all your assets, or arrange a reasonable debt restructuring plan.

You can resort to any of the above methods of debt settlement either on your own or through a debt service agency. The latter comes in handy especially if you are already emotionally traumatized and are not in any sound position to deal with your creditors. The agency is professionally well-equipped to deal with your lenders and may successfully arrange a feasible settlement plan. You grant the agency a limited power of attorney to negotiate with your creditors on your behalf.

Pitfalls of Debt Settlement

You must remember that except for debt consolidation, other settlements of debt will cause your credit rating to slip. The adverse rating will stay in your credit history for at least seven years, during which time you may be unable to apply for any kind of credit facility. Even if you do, you will get subprime rates and harsher terms and conditions.

Having a debt service agency represent you may be ideal if you lack the knowledge and emotional capability to deal directly with creditors, but private ones will charge you for the service. To avoid this unnecessary expense, consult government or charity-sponsored agencies.

Lastly, being able to get out of debt does not mean that you could go back to your old spending habits and risk incurring more debts than you can possibly control.


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