A debt settlement letter offers to settle a debt for less than the full amount owed, typically used for unsecured loans like credit card debt. Lenders may accept, reject, or make a counter offer, and it can affect the debtor’s credit rating.
A debt settlement letter is often written when a debtor is having difficulty paying a debt to a lender. Offer to settle the debt for less than the full amount owed. It is typically used when the amount of the debt earns interest but is not secured by any property, such as outstanding credit card debt.
A debtor can write a debt settlement letter on their own, or it can be issued by a debt settlement company or debt settlement attorney. Unsecured loan lenders, such as credit card companies, lend money with the understanding that the loan will be repaid with interest to compensate the lender for being willing to lend the money. Higher interest rates are charged for these loans than for secured loans, such as mortgages, because the risk to the lender is greater.
Without property that the lender can take if the debtor defaults, the lender risks not getting any of its money back. A lender may be willing to consider a debt settlement plan as set forth in the debt settlement letter if the lender fears that the lender may recover little or none of the principal and interest owed to it. Many lenders prefer to recover some of the money owed to them rather than cancel the entire debt. An offer to settle the debt for less than the amount due in the debt settlement letter will result in one of the lender’s responses: a rejection, a counter offer, or an acceptance.
A lender is unlikely to even consider a debt settlement letter unless the debtor is behind on their payments. This is because the lender’s first priority is to recover your capital and the agreed interest. In this case, the lender will reject the debt settlement offer. You might also reject the offer if the lender knows the debtor is due to receive a large sum of money, such as an inheritance or a court judgment.
If the lender makes a counter offer, the debtor should consider whether it is a plan the debtor can follow. A plan that puts the debtor back into a position of inability to pay is generally not helpful. Often, a counter offer is simply an initial position from which the lender will negotiate.
Acceptance of the debt settlement letter offer means that the debtor will be bound by the new agreement. The debt will likely show up as “paid off in full” instead of “paid off in full” on the debtor’s credit report, which can hurt the debtor’s credit rating. However, it is less damaging to a credit rating than a full debt default.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
