Being the president of a debt settlement company, I am often asked how debt settlement works. In order to fully understand and appreciate the process that takes place between debt settlement companies and credit collection agencies, consider the following:

Creditors know that roughly 30% of the 1.5 million bankruptcies that occurred last year were on debt that was reasonably current. Traditionally, people survive by borrowing from one creditor to pay another. However, this process eventually fails when consumers run out of available credit lines and find themselves unable to make their minimum monthly payments.

The most important part of debt settlement is to complete settlement process with your creditors and your collection agencies. In order to do this, it is necessary for a debt settlement company to have you sign a contract and a document that legally authorizes them to negotiate with your creditors on your behalf; this is known as a "Limited Power of Attorney."

During the settlement process, you will make a monthly deposit into a "settlement account" that will eventually be used for your debt repayment. As funds begin to accumulate in the account, the debt settlement company will start to negotiate with your creditors.

Once a debt settlement offer has been agreed upon, you will need to send that amount, directly from your account, to the creditor. Once the payment has been made, that debt is considered settled in full. You will no longer owe anything on that debt and the account will be closed.

Debt Settlement Process:
• The Setup: When you work with a debt settlement company, you stop paying your creditors and start paying into a trust account set up by the debt settlement company. Part of your payments goes towards fees and part of it goes towards an account that will then be used to pay off your creditors after negotiation.
• The Dark Waiting Period: The missed payments begin appearing on your credit history, your credit score drops, and creditors start calling you. Creditors typically write off debts that are over 180 days late, so as that date nears they become more and more anxious.
In addition to waiting for the creditors to get anxious, you have to wait for your trust fund’s balance to get high enough to pay down negotiated debts.
• Collections/Negotiation: At some point, the creditor will sell the debt to collections agencies for less than the debt itself. It is somewhere at this point that the negotiation begins with the debt collectors and you start eliminating your debt!

However, if debt negotiation does not sound right for you, you might want to consider a more traditional debt reduction program like debt consolidation (or credit counseling). You might not get out of debt as fast. However, you can still lower your interest rates - maybe even lower your monthly payments.

Author's Bio: 

Joseph Hernandez is the CEO of Debt Free Solutions, a debt consulting agency located in Long Beach, CA. His organization was created in October, 2000. His revolutionary debt program is like no other. Unlike other debt elimination programs, he drastically reduces the risks that are inevitable with all debt negotiation programs. Hence, his clients may be able to get out of debt fast-and safe.

Stop wasting money by making minimum payments. See how our revolutionary debt negotiation program may get you out of debt fast and safe!