One form of debt relief is debt settlement. This is the process of negotiating with a lender to pay off a debt at a figure less than the full amount owed. Debt settlement can be used for most types of unsecured loans, such as credit card debt. It is not available, however, for student loans or secured debts, such as car loans and mortgages.

Individuals can attempt debt settlement on their own; however, most people require professional assistance in order to get the best possible deal with the lender. Lawyers can assist in debt settlement, but their fees are often too high for people who are already financially strapped. Another alternative is a debt settlement company.

Debt settlement companies typically have working relationships with most of the credit card companies and can use these relationships to negotiate lower settlement amounts. The lender will insist upon payment in a lump sum; however, for clients who cannot afford to make a large, one-time payment, the debt settlement company will often set up a trust account. The client will then make monthly payments into the account until the settlement amount has been reached. The lender will usually need proof of several months of consistent payment into the trust account until collection efforts are discontinued.

As a method of debt relief, the use of a debt settlement company has its benefits. It can significantly lower a person’s total credit card debt and allow for monthly payments that are reasonable and affordable to the client. Moreover, successful pay-off through debt settlement will help to improve a person’s credit rating over time.

There are down-sides, however, to using a traditional debt settlement company. Most of these companies charge up-front fees to their clients before negotiating a settlement with lenders. If a trust account is established, they will often charge additional monthly fees until the final pay-out is made. These fees can be a hardship to a person who is already in a difficult financial situation. Moreover, the payment of up-front fees means that the client is left to trust that a lower settlement amount will be negotiated. A client could pay the up-front fee only to find that the lender is unwilling to reduce the pay-off amount by very much or at all. Finally, because the structured payment can last for several years, many clients become discouraged over time and stop making payments. This negates the settlement, and the full amount of the credit card debt will once again be owed.

As an alternative, a new model for debt settlement has been introduced by a few companies. Under this model, the client does not pay a fee to the company until a lower pay-off has been negotiated with the lender. The benefits of this new model are clear: the client can evaluate the settlement offer before it becomes binding, the company’s fees are more directly related to its success at negotiating a lower pay-off amount, and the client becomes more vested in the process and more likely to stick with the payment schedule.

This new model of debt settlement, where fees are not charged until a successful settlement has been negotiated, is the most ethical way of conducting business. It requires a debt settlement company to prove itself, not just make promises. It puts the client exactly where the client should be: in charge of making critical financial decisions. When considering a debt settlement company, make certain you inquire about how and when fees are paid and carefully consider a company that uses the new model for debt settlement.