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Debt Management
Case Studies

Antonia is from Pomona, CA and in October 2008 she owed $13,325 to 7 different unsecured creditors. Her average interest rate was 27%. Her monthly minimum payments were $515. Her FICO? score was 482.

A debt management plan was set up for her with a consolidated monthly payment of $417, at an average interest rate of 24 %. Her plan will take 5 years to pay off. After just over a year on the plan, her FICO score? rose to 566.

The concessions granted by Antonia?s creditors lowered her monthly payment by almost $100, and dropped her average interest rate by from 27% to 24%. Plus she?ll repay her entire debt of $13,325 in five years. Also, her credit score rose 84 points after 13 months of making regular DMP payments.

Note: This is an actual Springboard DMP client. The client?s name and possibly location has been changed to protect their privacy. Read More Debt Management Case Studies >>

Debt Settlement Programs

About the debt settlement process and how it works



Debt settlement programs take different forms, but their common goal is to negotiate with a creditor to accept a reduced amount to settle an outstanding debt.

How do debt settlement programs work?

Either the consumer or a professional debt settlement negotiator will contact a creditor and offer a settlement at a reduced amount. A typical amount offered might be 60% of the original amount owed, though when negotiating with collection agencies and other debt buyers, the amount offered might be much lower. An inexperienced consumer may not have much luck getting a creditor to settle a debt. With a traditional debt settlement, you are expected to have enough funds on hand to make the settlement offer outright, and be able to make the payment in full when the creditor accepts the settlement offer.

Many modern debt settlement programs involve a ?funds accumulation? model. The settlement negotiator will instruct you to stop making debt payments and instead send your monthly payment to them. They?ll collect their fees up front (a typical amount can be 15% of your outstanding balances), then start saving up your payments (typically can be over an 18 month period) until they have enough to make a settlement offer that will be accepted. You need to be aware that in the meantime, you are at risk of being sued by your creditor, and your credit rating will be devastated.

What debts can be settled?

Unsecured debts like credit cards are the most commonly settled debts. Medical debts, legal bills, and collections are also good candidates for settlement. Secured debts (auto loans, home loans, etc.) are not candidates for settlement, as the creditor can simply repossess the collateral if you fail to make your loan payments. However, sometimes after a repossession or foreclosure, there is a deficiency balance that must be repaid, and this balance can be settled. Tax debts can be settled, but this is a very risky process that should not be considered lightly. If you attempt to negotiate a settlement with the IRS and fail, you may find yourself in a much worse situation than you began.

The Debt Settlement Process

A typical debt settlement is a straight up negotiation. Sometimes if you have missed several payments in a row, a creditor might initiate the settlement process. Either way, the negotiation involves each party making a settlement offer. Your first offer may be accepted, or you may have to negotiate back and forth until there is mutual agreement. A professional negotiator might have a better idea of what a creditor will accept, based on experience and knowledge of the industry. Some settlement negotiators don?t negotiate until many months after you contact them initially. They will first expect you to pay their up-front fees and send them payments to fund a settlement account, which they will use to negotiate with your creditors.

Why would creditors settle?

Simply put, a creditor will only settle if that is the option that will get them the most money. A settlement is usually a debtor?s last resort before declaring bankruptcy. This is why you typically must have missed a few payments before making a settlement offer; your creditor must be convinced that they might lose your entire balance to bankruptcy if they don?t negotiate a reduced amount with you. With collection agencies and debt buyers, the debts are sometimes purchased for pennies on the dollar. In these cases even a low settlement offer will earn the collector more money than they paid for the debt, which makes a successful negotiation likely.

What?s the catch?

Debt settlement sounds like a great option for consumers who are deep in debt, but naturally there are drawbacks, some of which are significant. These must be fully considered before proceeding in order to weigh the pros and cons of a debt settlement program for you.

More About the Pros and Cons of Debt Settlement »

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