Debt Resolution

Debt resolution, also known as debt settlement or debt negotiation, is a debt relief strategy aimed at reducing the total amount of debt owed to creditors. In this process, a debtor or a debt settlement company negotiates with creditors to reach an agreement where the debtor pays a lump sum amount that is less than the total outstanding debt to settle the account. The difference between Debt Resolution and Debt Settlement is that often times once the debt has been negotiated down to the new terms the company can provide you with a loan to pay off the debt under the new terms which could help boost your credit back even faster provided you meet what their requirements are to do so.

Here’s how debt resolution typically works:

1. Financial Hardship: Debt resolution is often pursued by individuals or businesses facing financial hardship, where they are unable to keep up with their debt payments.
2. Savings Accumulation: Instead of making regular monthly payments to creditors, the debtor sets aside funds in a dedicated account to accumulate savings over time. The funds in this account will eventually be used to negotiate settlements with the creditors.
3. Negotiation: Once enough savings have accumulated, the debtor or the debt settlement company contacts creditors and negotiates to settle the debts for a reduced lump sum payment. Creditors may agree to accept a lower amount to recoup at least a portion of the debt rather than risk receiving nothing if the debtor declares bankruptcy.
4. Settlement Offers: Creditors may accept or reject the settlement offers. Successful negotiations result in an agreed-upon reduced amount to settle the debt.
5. Payment: Once a settlement is reached, the debtor makes the lump sum payment to the creditor, and the debt is considered resolved.
6. After successfully making on time payments into the program and your terms are all negoiated (on average 6-10 months depending on your program and company) you potentially qualify for a loan to pay off the remaining balances under your new negoiated terms of the debts to help build your credit up faster if you qualify for it. Now your payments go towards your new consolidation loan and the old debts are satisfied.

Pros of Debt Resolution:

1. Debt Reduction: Debt resolution can significantly reduce the total amount of debt owed, making it more manageable for the debtor to achieve financial relief.
2. Faster Debt Repayment: Compared to traditional repayment methods, debt resolution can lead to faster debt repayment, as settlements are typically reached within a few months to a couple of years.
3. Debt Relief for Financially Struggling Individuals: Debt resolution can be an option for individuals who are facing severe financial hardships and have difficulty making their regular debt payments.
4. A private and descrete way to elinate your debt without doing something detrimental such as bankrtupcy or credit counseling. Your accounts are shown as though they are paid by you and not a third party.

Cons of Debt Resolution:

1. Credit Impact: Debt resolution can have a negative impact on the debtor’s credit score, for the first few months into the program as it involves settling debts for less than the full amount owed, which may be reported on credit reports until the new terms are locked into place.
2. Creditor Cooperation: Not all creditors may be willing to negotiate or accept debt settlement offers, potentially limiting the effectiveness of the debt resolution process. Legitimate companies will know before hand which companies they can work with.
3. Fees and Risks: Debt resolution companies may charge fees for their services, and there is a risk that some creditors may take legal action against the debtor during the negotiation process. (rarely)

Debt resolution can be a viable option for those facing severe financial challenges, but it’s essential to consider the potential consequences and consult with a financial advisor or counselor before proceeding with this debt relief strategy.

Frequently Asked Questions

What is debt resolution?

Debt resolution is the process of negotiating with creditors to resolve an account for less than the full balance owed, usually through a lump sum built up over time. It is closely related to debt settlement and the terms are often used interchangeably in the industry.

How is debt resolution different from debt settlement?

In practice the mechanics are much the same, and many companies use the labels interchangeably. What matters more than the name is the specific structure: who holds your funds, how fees are charged, when creditors are contacted, and what happens if a creditor refuses to negotiate.

What does debt resolution cost?

Fees are typically charged as a percentage of the enrolled debt and, under federal rules, legitimate providers cannot charge you before an account is actually settled. Ask for the fee structure in writing and confirm that no fee is collected until a settlement is reached and you have made a payment on it.

What are the risks?

Your credit will be damaged because the approach generally involves falling behind. Creditors are not obligated to negotiate and may continue collection activity or sue. Forgiven balances may be treated as taxable income. These are real tradeoffs, not fine print.

What kinds of debt qualify?

It generally applies to unsecured debt such as credit cards, personal loans, and some medical bills. Secured debts like mortgages and auto loans, and most student loans, are usually not eligible because the lender has other remedies available.