Settling debt successfully essentially requires two things:
1. Convincing your unsecured creditors to actually negotiate your debts with you.
2. Having the money to pay the agreed upon settlement amount once the negotiation stage is concluded.
And stopping all payments to your unsecured creditors is a necessary step you must take in order to accomplish these two things.
It takes two parties in order to negotiate. Actually, let me rephrase that. It takes two willing parties to negotiate successfully. You see, if one side in the negotiation is not willing, or more specifically, not motivated enough to come to the table and discuss a settlement, the negotiation will fail.
So even though you have decided that you want to settle your debts with the companies that issued your credit cards, the fact is that they may have zero interest in doing so. And this is usually the case if you have been making payments on your accounts up until the point you decided to negotiate your debts.
Here's an example. Let's say you have been consistently making the minimum payments on your $10,000 credit card debt, but decide that you would rather settle the debt once and for all. You call up the credit card company and ask them to settle the debt for a one time lump sum payment of $3,000. Chances are the conversation will end right there. Why would a credit card company consider settling debt on which they are still receiving steady payments on? There is simply little incentive for them to do so.
Now consider this scenario.
You have been making the minimum payments on your $10,000 credit card debt lately, but due to your overall financial situation, you decide to seek a settlement of that debt. As the first step in this debt elimination process you immediately stop making payments on all of your unsecured debts. Six months go by...
Now you make a phone call to the credit card company again looking to negotiate a settlement of your debt. Guess what? This time you just might find a willing partner to negotiate with. Why? Well, now the credit card company has something to motivate them to "come to the table" so to speak. In other words, they fear the possible loss of the entire $10,000 debt if you were to declare bankruptcy. Now they have to make a decision. Do they hold out for the entire $10,000 in debt and risk ending up with nothing if you file bankruptcy? Or instead, do they consider accepting say 30 cents on the dollar ($3,000) in one lump sum payment today in return for dismissing your debt? This is where your (or a debt settlement attorney's or debt settlement company's) debt negotiation skills come into play.
How successful you are at settling debt at this stage depends completely on the execution of the negotiation process.
Once the debt settlement negotiation process is complete, and you and your creditor have agreed upon a settlement amount, you must come up with the money to pay it. But where will the money come from?
As we mentioned earlier, when you decided on settling debt instead of paying it off slowly over time, you stopped making payments to your unsecured creditors. So what happens to the money that you were using each month to make those payments? It goes into a separate bank account each month (an account controlled by you), in order to build up funds from which you can ultimately pay off any settled debts. And the faster you accumulate money for settling debt, the faster the entire debt settlement process will conclude.
The scenario that I have laid out above is a very simplistic look at the debt settlement process. Remember, debt settlement is not an appropriate debt solution for most people. Settling debt rather than paying it back is usually only appropriate for people who would otherwise be faced with a bankruptcy filing.
Therefore, if you are able to eliminate your debts by paying them off over time, this should be your first option. Debt settlement is not suitable for people who have the means to pay off their debts, but not the desire. If you are unsure about what your next (or first) step should be in order to begin getting yourself out of debt, I recommend that you seek the advice of a professional debt counselor. During a free consultation they can help you assess your current debt situation, and offer advice on appropriate debt relief options, including debt settlement if in fact this is your best option.
If, on the other hand, you are unfortunately facing what appears to be an inevitable bankruptcy filing, opting to settle your debt may be the right choice for you. If this describes your situation, at the very least you should speak to a bankruptcy attorney and a debt settlement company in order to help compare the pros and cons of each debt elimination option.