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Debt Settlement is also popularly known as Debt Negotiation or Debt Arbitration. It is a technique that aims to reduce one's debt. As a theory, lenders have long been using debt settlement from thousands of years ago. It was only in the 1980s that debt settlement became well-known in the US. This was said to be attributed to the proliferation of bank deregulation thus yielding to consumer lending acts and economic recession that really burdened consumers. It was then that charging-off of loans and debts have been practiced more commonly both by banking and quasi-banking institutions. The banks began to come up with their own departments for debt settlement with the authority to negotiate with those whose payments have been in default.
Settlements were also necessary to minimize the losses that these financial institutions may incur through the said transactions. In other words, creditors have the intention to be able to collect as much as they can from a debtor who is having great difficulty in paying due to justifiable reasons such as financial instability or near-bankrupt states.
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The criticism that has always been thrown against debt settlement are that it damages credit, it increases the effects of the inconvenience of collection calls, the probability of being sued, tax consequences and the need to be in agreement with the creditors. The truth of the matter is, the debtor may still continue to be vulnerable against law suits because they remain in default for quite a time. Most of these debt collectors and creditors prefer a payment that is lump sum or fixed than the payment of the debt in full. This is because monthly payments are not large enough to warrant a payment negotiation for a settlement. Moreover, the charged service fee by the debt collector often is deducted from the top. Therefore, the settlement company will take a long time before there is enough money to have reasonable bargaining power.
Debt settlement distorts the credit scores report. A credit report is employed by creditors to assess a person's eligibility to contract a loan from them. An insurance company also assesses the premiums based on one's credit standing. Last but not the least, employers check the credit score of a potential employee to assess his or her character. Another waterloo of debt settlement is the necessity to report it as a taxable income when a part of the debt has already been cancelled. Therefore, the canceled part becomes taxable, which in a way defeats the purpose of being able to settle.
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