Being in debt can be suffocating and it is understandable why people seek to do debt settlement. Debt settlement, also called credit settlement or debt negotiation, is a debt consolidation method whereby you agree with your creditors that they accept a reduced payment as full settlement for the debt you owe them.
From October 2010, for-profit debt settlement companies started advertising to Canadians a new method of settling credit card debt. Canadians could stop paying creditors, save up the money, and then hire “expert negotiators” to negotiate with creditors. This is also a common practice in the U.S. However, this method does not really work. This is because:
Before October 2010, Canadians could only do debt settlement in one way. They could get most of the money, contract creditors, and then offer to pay off full or part of the balance in a lump sum payment. If creditors agreed, you got to pay as low as 50% to 80% of the debt.
You should stick to non-profit credit counseling organizations because they are usually very successful negotiation debt settlements. These organizations do not agree to do debt settlements unless this is the only debt consolidation option left.
Once creditors agree to the debt settlement, you will not be charged any fees or interest if you are able to pay up by the settlement expiry date. The debt will then be considered legally paid off in full. However, ensure that this is captured in writing when negotiating with creditors so they don’t turn on you for the rest of the money.
Debt settlement can be as low as 20% of the full amount to over 80%, depending on your particular situation. As an example, if you have lost your job and you are now working on a lower-paying part-time job, creditors will see you are unable to pay the full amount and since they don’t want you to file for bankruptcy (which means they will not be paid anything), they can accept a lower debt settlement.