Reduce What You Owe

• Debt settlement involves negotiating with your creditors to repay less than what you owe. The amount of the settlement will depend on the creditor, the total balance due, how delinquent your account is and how much cash you have on hand to work with. Generally, you can expect to settle your debts for anywhere from 30 to 70 percent of the actual balance due. Debt settlement saves you money by reducing your overall balance and eliminating the additional interest and fees that you would pay if you resumed regular monthly payments. By making a one-time lump sum payment on a particular debt, you not only save money but you're also able to clear your debts in a shorter period of time.
  
  

Stop Collection Actions

• When you fall behind on your bills, the law allows your creditors to take certain actions against you to collect what you owe. This includes regularly contacting you by phone or mail, filing civil lawsuits against you, enforcing wage garnishments or freezing your bank account. While these measures may seem extreme, creditors can and do use these tactics. If your creditor takes you to court and you can offer no proof that you are not responsible for the debt, the court enforces a judgment against you that can remain on your credit for years. By contacting your creditors and negotiating a settlement, you can effectively preempt them from taking further collection actions against you.
  
  

Rebuild Credit

• Before a creditor will consider a settlement, you must be behind on your account. Typically, creditors are unwilling to settle unless you are at least 30 to 60 days delinquent. When you fail to make regular payments to your creditors, they can and will report this information to one or all of the three major credit-reporting bureaus: Equifax, Experian and TransUnion. When a late or missed payment shows up on your credit, this can cause your credit score to drop significantly. As your score drops, you may find that it becomes more difficult to establish new credit. Your creditors may also raise your interest rates or close your accounts altogether. When you settle a debt, you can request that your creditor report the account as paid. Over time, your credit will begin to improve as no new delinquencies are reported.
  
  

Avoid Bankruptcy

• For many debtors, bankruptcy may seem like the only option for dealing with debt. If you can't afford to make your minimum payments, have few assets and lack steady income, you may want to consider speaking with a bankruptcy attorney to assess your situation. However, if you're working regularly and have cash on hand to offer to your creditors, debt settlement can be a less expensive alternative to bankruptcy. Debt settlement can also help you to avoid the damage to your credit that bankruptcy causes. A Chapter 7 bankruptcy can remain on your credit for up to 10 years, while Chapter 13 can last for up to seven years.