Credit card debt bankruptcy - how a debt settlement procedure works

Credit card debt bankruptcy - how a debt settlement procedure works

Credit card debt bankruptcy became widespread after the recession. With millions of consumers losing their jobs, they failed to repay their creditors and as an end result, they became defaulters. With the urge to get out of debt as soon as possible, many consumers opted for bankruptcy assuming that this method will lead them out of debt asap and that they will be debt free completely. True was there second assumption. They really did manage to get out of debt but unfortunately they had to face numerous financial troubles associated with the method of bankruptcy. They lost their credit score and they failed to get any further loan. This "no new credit" phase will continue for 7-10 years. On the other hand, the creditors faced some troubles as well. The creditors failed to get back even a single dime after the consumers filed for bankruptcy. This way, they incurred a loss of billions of dollars and became financially weak. They slowly approached bankruptcy and the whole economy became weak.

The Federal government brought down restrictions on the method of bankruptcy and promoted debt settlement as an alternative method of debt relief. Settlement turned out to be a handy method where the consumers managed to get rid of at least 50% of their debts and at the same time, they managed to retain their credit score. It is because of this reason that debt settlement became a popular method of debt relief.

Settlement requires a consumer to be in $10k or more in debt. This means that if the debt amount is less that $10k, the process will not work. A consumer can decide to negotiate with the creditor on his or her own and also the consumer has the freedom to hire a professional debt settlement company. It is better to go for the second option because of the fact that if the consumer decides to go for do-it-yourself arbitration, the maximum amount of debt elimination that her or she can get is 30%. However, when a consumer uses a professional debt settlement company, the minimum amount of elimination that he or she can get is 50% and the maximum that can be attained is 70%.

When a consumer hires a professional company, the negotiator from the company, listens to the consumer and goes through all the details and then creates a repayment plan. Once the plan is complete, the negotiator sends a letter to the creditor stating that the consumer no longer has a financial condition to repay the debt in full. As a result, the consumer is willing to go for a debt settlement deal. The letter ensures that no legal actions are taken from the creditor's end. The negotiator will ask the consumer to stop paying the creditor.

After the consumer goes delinquent, the creditor waits for a period of 3-4 months after which, the creditor sells off the debt to a collection agency for recovery with a hope that the threatening calls from the collection agency will force the consumer to repay the debt. However, when the creditor sells off the debt at a rate of 20 cents to 30 cents per dollar, the negotiator contacts the creditor and offers 30 cents to 50 cents per dollar to the creditor and that too in bulk. The negotiator threatens the creditor by saying that in case this new offer is rejected by the creditor, the consumer will be forced to file for bankruptcy.

The creditor finds that the new deal is better than the one with the collection agency in terms that the money that can be recovered in more and that the money comes in bulk. Also, the creditor never wants the consumer to file for bankruptcy and hence eliminates the debt that the consumer has by at least 50%. The consumer then needs to repay the remaining amount to the creditor in one shot. This is how the process of debt settlement works.

Debt settlement is a viable option to filing bankruptcy and is becoming increasingly popular amongst Americans with over $10k in unsecured debt. Creditors are ready to negotiate. You can literally eliminate 50% of your unsecured debt with a settlement.

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