Soon after you contact a debt settlement company, the analyst working with you will evaluate your debt load and creditor list. Then they can make a confident estimate on how much you will be able to save based on their experience with your particular creditors.
Remember, they’ve done this before! This figure (the percentage of your debt hat you will agree to pay in settlement) can range anywhere from 15% to 75%.

After signing on with a company, the first step is to authorize them to work on your behalf. This enables them to handle almost all communication with your creditors, including statements and phone communication.
The next step for them is to set you up with an affordable payment schedule. They may also help you find sources of money in lump sums that you have access to (gifts from relatives, home equity loans, other assets, etc.).
Most creditors will not want to talk settlement with you if you are current or only a month or two behind in your payment. If you are at least 3 months behind, then they will start to get the idea that they may not see another dime from you, at which point, settling with you looks better and better.

If you are significantly behind in your payments (3+ months), the negotiating can begin.
Your settlement company will keep you updated on their progress and will let you know when they believe they have a good settlement offer in hand.

When you agree to a settlement, and have the funds available, the settlement will be made on your behalf with your creditor.
You are now free from that debt!
Remember, it will usually be significantly less than what you actually owed, (including late and over-limit fees) and will be marked ‘paid’, ’settled’, or something similar on your credit report.

What You Might Experience
Some pesky creditors may continue to call.
If you find yourself in a conversation with a creditor or a collector, be polite, contrite and keep the conversation short.

Let them know you are aware that you owe them money, and are experiencing some financial hardship and direct them to your settlement company, because they are your agent.

Your credit score will be hurt. However, chances are, your credit is already in pretty rough shape and settling your debt will improve your debt-to-income ratio. That alone will increase your credit score, and offset the negative impact of a delinquency or settlement.
Your credit score will not suffer as much as you think. Contrary to what the “experts” tell you, this shouldn’t be a major factor in your decision to go with debt settlement.

After all your debts are settled, you will want to repair your credit. Repairing your credit can be a tedious process, but it can be made easier with the help of a reputable credit repair company.

In short, you will need to obtain your credit reports, scour them for negative or inaccurate items and dispute them. This is a one way to clean your report and to help get good credit back quickly.

The Cons

• Need to be behind or stop paying. Otherwise why would the banks accept less than what you owe? The threat of getting nothing, like when you are behind in your payments, entices them to consider a settlement offer. So if you are not behind, settlement won’t work unless you stop paying (keep in mind I’m not telling you that you should stop paying, just letting you how it works).

• Fees. Late fees will continue to accrue on your unpaid accounts, piling up on your credit record. One possible consequence is a creditor may decide to file a case in civil court, which can lead to your bank accounts and salary being garnished until the debt is paid off. Another scenario may lead to the creditor selling or assigning your account to a collection agency, which is also apt to have a negative impact on your credit rating.

• Pay taxes on savings. If you owe $25,000, and settle for $12,000, you owe taxes on the $13,000 you saved. Of course, this is a LOT less than what you would have paid in interest over the 20 years it would have taken you to get out of debt. Talk with your tax person if you’re not sure how this will affect you.

• Settlement Cost. You’ll either need to pay someone to settle the debts for you, or you’ll need to learn how to do it yourself (which can take time, money, or both)

• Credit score will take a hit. After all, you’re not paying your debts back as you agreed to when you signed up for the credit card. So the settlement will appear on your credit report, along with the late payments. And your credit score will be lowered. But if you have so much debt that you’re in financial trouble in the first place, "good credit" is merely an illusion anyway.

• Creditor calls. If you’re behind in your payments, your creditors will call. A good settlement company will help to reduce or eliminate these calls. But you’ll still get them. And they’re no fun. But if debt settlement is really the right solution for you, they’re simply a small bump in the road.

• Not for everyone. Debt settlement is aggressive. And stressful. And takes time. And requires you to stop paying if you’re not behind already. So if you’re not comfortable with any of the "cons" above, or if you really can pay your bills, it probably is not right for you.

The Pros

Decreased interest rates: Debt management programs are effective in obtaining substantial reductions in interest rates for debtors struggling with high interest rates. Many of the major credit card issuers routinely reduce interest rates from 18 to 28% or more down to 1.5% of your income to an average of 9.99% combined. Some can be even lower, while others tend to remain higher. Reputable non-profit credit counseling organizations can supply you with a good faith estimate of total interest paid over the course of your proposed debt management program.

Possible lower minimum payments: The drop in interest tends to allow for a reduced minimum monthly payment. If the majority of your creditors provide a reduction in your payments, then your debt management program payment may be lower than your current regular payments. This reduction is even more pronounced for debtors that are falling behind. Most participants experience a meaningful reduction in their monthly payments.

Possible re-aging of accounts: Some creditors are willing to re-age a delinquent account so that it reports as current. This on-time payment status can eliminate pesky late fees. It can also help your credit scores bounce back.

Possible end to collection calls: Once a creditor accepts a proposal from your credit counseling organization and receives the initial program payment, collection or courtesy calls usually stop.

The Cons

Debt counseling plans are by no means a magic bullet for your financial troubles. Despite their many benefits, there are still numerous risks and some high costs involved with a debt management program.

High Cost: Since these companies work for Credit Card Companies, they don’t have your best interest in mind. You will typically pay 110% or more of your debt.

Some interest remains: Although debt counseling programs are highly effective at reducing the interest rates on credit cards and certain unsecured loans, you likely have to pay remaining interest on those accounts. This interest can comprise a portion of your monthly program payment. This amount is normally a fraction of what you would have paid, but it’s important to be aware of the remaining interest. Still with most accounts averaging 7-12%, you could see many rates cut in half.

Creditors can show your participation: Some creditors may place a label under your account with one or more credit bureaus. This can eliminate getting a loan while you’re still repaying your debt. This should be a non factor if you focus on repaying debt before opening new accounts. Regardless of whether creditors report your participation in a debt management program, that label will impact your credit worthiness.

Account tenure comes to an end: Up to 15% of the credit score calculation has to do with the length of time that you have held a credit account. By joining a debt management program, your credit accounts are inactivated. While these still can be reflected on your credit report in a positive manner, their significance will decrease over time as they become older. You can guard against this by maintaining other current credit accounts that are still active, such as a car loan or mortgage loan.

Chapter 7 Bankruptcy

Property liquidation. In Chapter 7 bankruptcy, some of your property may be sold to pay down your debt. In return, most or all of your unsecured debts (that is, debts for which collateral has not been pledged) will be erased. You get to keep any property that is classified as exempt under the state or federal laws available to you (such as your clothes, car, and household furnishings). Many debtors who file for Chapter 7 bankruptcy are pleased to learn that all of their property is exempt.

Secured debt. If you owe money on a secured debt (for example, a car loan for which the car is pledged as a guarantee of payment), you have a choice of allowing the creditor to repossess the property; continuing your payments on the property under the contract (if the lender agrees); or paying the creditor a lump sum amount equal to the current replacement value of the property. Some types of secured debts can be eliminated in Chapter 7 bankruptcy.

Eligibility for Chapter 7. Not everyone can file for Chapter 7 bankruptcy. For example, if your disposable income is sufficient to fund a Chapter 13 repayment plan — after subtracting certain allowed expenses and monthly payments for certain debts — you won’t be allowed to use Chapter 7 bankruptcy.

Bankruptcy doesn’t work on some kinds of debts. Though bankruptcy can eliminate many kinds of debts, such as credit card debt, medical bills, and unsecured loans, there are many types of debts, including child support and spousal support obligations and most tax debts, that cannot be wiped out in bankruptcy.

Chapter 13 Bankruptcy

Repayment. When you file for Chapter 13 bankruptcy, you must propose a repayment plan that details how you are going to pay back your debts over the next three to five years. The minimum amount you’ll have to repay depends on how much you earn, how much you owe, and how much your unsecured creditors would have received if you’d filed for Chapter 7 bankruptcy.

Debt limits. Your debts must be within limits set by the federal government: Currently, you may not have more than $1,010, 650 in secured debt and $336,900 in unsecured debt.

Secured debts. If you have secured debts, Chapter 13 gives you an option to make up missed payments to avoid repossession or foreclosure. You can include these past due amounts in your repayment plan and make them up over time.

For more information on Chapter 13 bankruptcy, please consult with a bankruptcy attorney.

Other Types of Reorganization Bankruptcy

In addition to Chapter 13 bankruptcy, there are two other types of reorganization bankruptcy: Chapter 11 and Chapter 12.

Chapter 11 bankruptcy. Chapter 11 is typically used by financially struggling businesses to reorganize their affairs. It is also available to individuals, but because Chapter 11 bankruptcy is expensive and time-consuming, it is generally used only by those whose debts exceed the Chapter 13 bankruptcy limits (rare) or who own substantial nonexempt assets (such as several pieces of real estate). If you are considering Chapter 11 bankruptcy, you’ll need to talk to a lawyer.