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 terms of severity, debt settlement falls in between establishing a debt management plan and filing for bankruptcy. Debt management plans use credit counselors to consolidate payments from multiple creditors at reduced interest rates - but creditors still receive100% of what they're owed. Bankruptcy (the Chapter 7 form) discharges debts, leaving creditors with 0% of what they're owed. Debt settlement typically results in creditors being paid around 50% 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 can save you enough time, peace of mind, and money to more than compensate for the fee that he or she 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 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 is 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 - usually around 50% - and paid off with the debtor's savings. 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 ordered by the court as a precursor to bankruptcy. Each party - the creditor and the debtor - are typically represented by professional negotiators (although the parties can represent themselves), and an impartial third party (similar to a judge) 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 rules in favor of one of the two.

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.