Debt Settlement

When a debtor and a creditor both agree to satisfy a debt for less than what is fully owed, it is known as a debt settlement. The process of proposing and agreeing to that settlement is known as debt negotiations.

Both parties have their own reasons considering a debt settlement arrangement.

The debtor is trying to get rid of their debt of course, but is also doing what they can to clean up their financial arrears without declaring bankruptcy. In many cases, were they unable to initiate debt negotiations, bankruptcy would become the only alternative for those stretched too far beyond their financial means.

For the creditor, a debt settlement means they will still receive partial payment, which is often more than they would get were the debtor to go bankrupt. Direct negotiations can also save them money on collection agency and legal fees that would otherwise be spent trying to recover the full debt.

There are debt management organizations that will use a mix of both settlement and debt consolidation efforts, first negotiating each individual debt with creditors, then consolidating the remainder owed at a lower interest rate.