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Understanding Debt Resolution and How it Works

By Adem Selita

Debt Resolution is the process of settling debts with your creditors in order to reduce the amount you owe and pay back less. The process is most common used by consumers who are not making progress on repayment of their debts or are undergoing significant hardship.

How it Works

Once you enroll in a debt resolution program, you will have one lower monthly payment that accrues in a dedicated savings account. The debt relief company will then reach out to your creditors to renegotiate a better repayment plan, reducing your principal amount and saving your money. It’s important to note, while all this is going on you are NOT actively making minimum payments and will be defaulting on your debt obligations in the short term. Due to this, you will typically see a negative impact to your credit worthiness.

Pros

  1. You will save significant amounts from the principal you owe and pay off your debt at a discount.
  2. You will end the vicious cycle of making minimum payments and finally have a set plan to eliminate your debt entirely. Approximately 70-80% of minimum payments are applied towards interest, therefore you are also saving a significant amount on interest payments.
  3. You will also see cashflow savings since your debt resolution payment should be much less than your monthly debt obligations, giving you more cash flow at the end of each month.

Cons

  • You will see a negative impact to your credit worthiness and will be marked as late on any accounts you settle/resolve.
  • Any credit card accounts you wish to resolve will also have to be closed if they are not already.
  • If you save over $600 in principal you could receive a 1099 for the amount forgiven.

Attorney or Non-Attorney

There is no real difference between debt settlement whether it’s done by attorney or non-attorney! Both options can be categorized as “debt settlement” or “debt resolution”, whether or not an attorney is involved or not. The main difference between attorney debt settlement or non-attorney debt settlement is that an attorney may take a more active approach in resolving your debts (although often times this will still be done by negotiators). The pros and cons remain the same here. Attorneys are also allowed to charge upfront fees if they so choose.

Debt Management as an Alternative?

Debt management is the process of paying a debt management company to renegotiate your interest rates. This usually does not provide as much savings as a debt resolution program since there is no principal reduction. Thankfully this will not have as negative an impact to your credit worthiness as settlement but it will not also offer as significant a savings. On the downside, you will not save nearly as much as you would with a debt resolution option since you are not reducing the principal amount of the debt whatsoever and are only getting a reduction in the interest rate.

Research

It’s very important to do your research when looking for a good debt relief company. Always make sure to thoroughly check customer reviews and online citations. You will also want to look to avoid companies that charges upfront fees. The company should not take fees until they successfully resolved a debt on your behalf, this way their interests are aligned with yours and they are incentivized to get you the best deal possible. After you’ve finished doing your research, you should then call the companies you have in mind to get a feel for which will provide the best service and how much they charge. With all the above you should be able to come to conclusion about who to choose.

Make sure to always do your research when considering debt resolution programs and debt management plans! There are bad non-profit companies and there are good non-profit companies. There are bad attorneys and there are good attorneys. Even if a debt management company is a non-profit organization, they still have fees and they might not have as much incentive to save you as much money as a for profit company does. Even if you enter a debt resolution program with an attorney, this doesn’t always mean this will get you of debt for the smallest dollar amount. Attorneys can be costly and often times your attorney doesn’t negotiate on the file themselves, this is often done by negotiators that act on behalf of the attorney. These are all things to be mindful of, not to dissuade or persuade you one way or another. All options have their benefits and downsides and each should be weighed carefully.