What Is Debt Reduction?
Maybe it would be easier to start off with what debt reduction is not -- and it’s not the same thing as debt elimination. In fact, any organization that claims to be able to magically erase all of your debts isn’t an organization you should trust, because that sort of wizardry just won’t happen in the financial world.
Debt reduction is a negotiation with lenders wherein both parties agree to a fixed settlement amount to be paid by the debtor. This settlement amount is usually lower than the original balance due -- especially when interest rates are factored in -- which is good for the debtor. And allowing the debtor to avoid filing for bankruptcy is good for the lenders, because lenders usually end up empty-handed when a debtor files for bankruptcy. Sure, in the lenders’ perfect world, the debtor would have to pay back the original balance and all the interest rates and extra fees, but creditors know that getting a partial payment is better than getting nothing at all.
The Debt Reduction Process
The debt reduction process can take anywhere from 12 months to three years, and yes, we know that three years seems like a really long time for one negotiation to take place. Just remember, lenders don’t particularly want to make settlements with their debtors because it means that the lenders will end up getting less money in the long run. Nevertheless, they do realize that if the only other option for the debtor is to file for bankruptcy, then reaching a payment agreement is a much better option.
Debtors usually choose to work with a debt reduction company throughout the process, because the experts at these companies are experienced with negotiating with lenders and collection agencies. These advisers won’t be dealing with all the stress that their clients are dealing with, which allows them to make the most rational decisions possible.
When you choose to work with a debt reduction agency, you’ll be asked to sign a legal contract stating that your advisers are allowed to negotiate with creditors on your behalf. This company will let the creditors know that you’re actively working on paying off your debts, and most debtors notice a significant decrease in the number of unpleasant creditor phone calls and emails. Creditors are still legally allowed to contact debtors directly, but most creditors will comply with the debt reduction agency’s request to direct all questions and concerns toward the company, rather than toward you.
Throughout the reduction process, you’ll receive a monthly deposit right into a trust account, and this allows your financial advisers to regularly monitor how much money you’re spending and saving. As the balance in this account increases, the reduction company will start negotiating with your lenders and collection agency representatives, and the two sides will agree on a final settlement. You’ll be required to transfer that amount from your trust account over to the creditors, and once that full payment is made, your debt is considered settled.