Debt Settlement, Debt Negotiation, Debt Arbitration - Understanding the Differences

Debt Settlement, Debt Negotiation, Debt Arbitration - What's the Difference?

The last thing that people in search of debt relief need is a bunch of confusing terminology, but unfortunately, that's what they get. There is a lot of confusion as to what "credit counseling" means, for example. Is it synonymous with "debt management", or is debt management just an element of credit counseling? How does debt consolidation figure into credit counseling / debt management? For the answers to these questions, browse around Debt Relief USA, your one-stop source for personal finance education.

But on to the subject at hand: What is debt settlement, and how does it relate to debt negotiation and debt arbitration? For that matter, how do they all interplay with credit counseling and debt management?

Debt Settlement and Debt Negotiation

Debt settlement refers to the satisfaction of a debt for less than the total amount owed - debt negotiation is the process by which debt settlement is reached. In some respects, debt settlement falls "in between" establishing a debt management plan and filing for bankruptcy. Debt management plans use credit counselors in an attempt to consolidate payments from multiple creditors at reduced interest rates - but typically creditors still receive 100% of what they're owed. Bankruptcy (the Chapter 7 form) may discharges debts, leaving creditors with 0% of what they're owed. A successful debt settlement typically results in creditors being paid a percentage of what they're owed in a single lump sum per creditor.

Debt settlement can be achieved without professional help. But remember, debt negotiation is the process by which debt settlement is reached. Hiring a professional to negotiate on your behalf may save you enough time, peace of mind, and money to compensate for the fee that the professional is paid.

The Controversial Aspect of Debt Settlement

The basic idea behind debt settlement is that you stop making your regular payments, and instead, begin setting aside money in a designated account to save for a lump-sum payoff. Some people consider this immoral, since you obviously have the ability to pay, at least to some degree. But if you can't make the required monthly payments and even a debt management plan with reduced interest wouldn't help, your only other option may be bankruptcy. Which is more "moral"?

Typically, debtors pursuing a debt settlement strategy will stop paying all of their bills and begin a debt negotiation process with one creditor, usually through a professional representative. Once a lump-sum amount is agreed upon, the debt is settled for less than the total amount and paid off with the debtor's savings that have accrued in a designated account. Then the debt negotiator moves on to the next creditor, until all of the debtor's debts are settled.

Where Does Debt Arbitration Come Into Play?

If debt settlement falls in between debt management and bankruptcy, then debt arbitration is slightly to the bankruptcy-side of debt settlement. Unlike debt settlement, debt arbitration is often (although not always) ordered by the court as a precursor to bankruptcy. Each party - the creditor and the debtor - is typically represented by professional negotiators (although the parties can represent themselves), and an impartial third party (called an arbitrator) makes a ruling. Basically, debt arbitration is normally for people who are able but unwilling to repay their debts, or for creditors who are unwilling to budge. Arbitration allows them to make their cases before a disinterested expert, who then makes a ruling.

Which Strategy is Best for You?

Credit counseling, debt management, debt negotiation, debt settlement, debt arbitration, bankruptcy... It's all a lot to digest. The important thing is to lose the shame you may feel as a result of finding yourself in need of debt relief. Shame clouds your vision and makes it difficult for your to face your problems. Maybe you've fallen on hard times - or maybe you've just made some big mistakes. Regardless, sulking will not improve your situation - only action will. And before you act, you need to become informed. Debt Relief USA aims to be your one-stop source for all of the information you need in order to begin rebuilding your financial life. Look around, learn all that you need to know, and then take charge of the situation. It may be an uphill battle, but the sooner you start, the less of a mountain you'll have to climb.