Typically when a borrower defaults on loan repayments, lenders wish to forgo a certain percentage of the loan rather than forfeiting all the cash owed in case the borrower becomes insolvent. Debt negotiation is the process of negotiation carried among the borrower and the lender to lessen the amount of loan.  Debt settlement is usually considered a solution to unpaid debt payments of over a couple of months or an alternative to bankruptcy.

Fundamentally, the process of credit settlement involves negotiations between the debt settlement companies on behalf of the debtor and the creditor to reduce the overall debt to a lump sum amount. Generally, both the parties agree on a specific percentage of the total balance to be forgiven by the creditor. But, debt settlement cannot be carried out for all kinds of loans. Unsecured debts that are not secured by genuine possessions such as car, land or property cannot be settled.

Mostly, debt negotiation is carried out by institutions that specialize in debt settlement or legal advisors who help lenders in negotiating debt settlement. However, in return for their services, these debt settlement companies usually charge big service fees in the form of a percentage of the total debt owed, or a percentage of the debt amount forgiven along with initial sign-up fee and monthly service charges.

While debt settlement may seem to be a very good legal solution to unpaid bills, it has its disadvantages as well. Once a loan is forfeited, the borrower may not be able to obtain unsecured loan like credit card loan or medical treatment installments  for a long time. Even after debt settlement takes place, it is reflected in the debt scores thus decreasing the debt standing of the borrower. On the other hand, if the lender promises beforehand to give a ‘paid in full’ letter, debt settlement may not influence the debt score.

As the debt settlement institutions demand cash to be paid periodically and place it in an account till the time the lender can be paid, therefore, debt settlement may carry on for a long time. Meanwhile, the interest and late fee may keep on accruing and the bills may keep on increasing. The lenders may also seek professional help to claim the owed money or may prosecute the borrower so as to regain the advanced loan.

As the debt settlement institutions demand a lot of compensation for their work and because of the prolonged settlement time, most clients pull out of settlement. Borrowers usually think that after a couple of years of depositing cash to the settlement institution accounts, they are in the exact situation as they were before as most of the money is paid to settlement institutions as their fee. 

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