subject: Debt Relief Services – How Does Debt Reduction Work And Its Effects [print this page] Debt Relief Services How Does Debt Reduction Work And Its Effects
If a consumer wants to avoid bankruptcy and credit counselling services and still wants to get rid of his unsecured debt then one of the best ways is through debt reduction programs. Each debt reduction company has its own set of methods and practices which they follow. A customer stops making payments to the creditors directly but instead makes payment to the debt relief company instead every month. The company then negotiates with the creditors to reduce the debt amount, interest rates and additional fees charged and makes payment to the creditors on behalf of the debtor.
Get approval: The first step is to know if your financial condition qualifies for a debt reduction. For this, the consultant form the debt reduction company will go through your finances like the amount that you owe, the state's requirement and the activity on the account. He will then compare it with your current income and check if you can pay down the debt through this method. If the income is limited and cannot match up then they may suggest the customer to opt for bankruptcy as debt reduction many not be a feasible solution.
Settlement amount: The consumer starts paying the reduction company a monthly fee. This amount is deposited in a separate account. The amount is not immediately given to the creditor but is allowed to accumulate. Once the accumulated amount is high enough, the reduction company will approach the creditors for a settlement. Before the negotiation begins the customer should have accumulated at least 40 % to 60% of the total amount that is actually owed.
The debt consultant will then negotiated a settlement amount with the creditors on behalf of the consumer and offer a onetime payment to the creditors in exchange of settlement. Once the creditor agrees to the settlement offer and the amount is paid, he then reports the account as settled or paid to the credit reporting agencies. Then the creditor cannot demand for funds from the customer. It is also possible to pay off the creditors within a period of 3 to 4 months if they agree for a payment plan.
The consumer must understand that a debt reduction company will be charging a fee for their services. It can be a flat monthly fee or a percentage of the settled amount. Such details should be discussed before finalising the company. Debt reduction has a negative impact on the credit report, hence one may have difficulty in getting credit in near future.
