Debt Settlement, also called debt negotiation is an arrangement between a debtor and a creditor to repay a debt generally for a for a lowered payoff amount. When a debtor is not able to pay the debt any more for any reasons, debt settlement is the only option that remains.
Generally, only unsecured debts, like those accrued with credit cards , can be negotiated for settlement. This is because of the fact that there is no security attached with unsecured debts. Hence, the lender can't repossess anything. On the other hand secured debts, like home loans, mortgages, car loans etc. have a collateral attached to them and can be repossessed by the lender if a default on debt occurs. So, there is no debt settlement or negotiation with secured debts.
Many third party companies offer debt settlement and negotiation services.
These companies contact both the lender and the borrower and negotiate on the
behalf of borrower to get the repayment amount and terms reduced. These services don't come cheap. Some good debt settlement companies can get the debt reduced by 50% or more, but charge around 10-20% of the debt amount as their fees.
To support the debt settlement industry and develop standards and best practices, practitioners established the United States Organization for Bankruptcy Alternatives (USOBA) in 2004 and in 2005, industry leaders established The Association of Settlement Companies. (TASC) TASC's goals are to promote good practice in the debt settlement industry, protect the interests of consumer debtors, and lobby on behalf of debt settlement companies on the federal and state level.
It has to be remembered that debt negotiation is getting the debt burden
reduced and becoming debt free. Debt settlement shows poorly on a persons credit report and if not tackled properly can lead to bankruptcy.