Here’s what it involves:

You stop making your payments to your unsecured creditors. Instead you start making a regular monthly payment to a separate savings account. (These payments are typically lower than the minimum payments you probably have been making.) After your debts go unpaid for several months, they will typically be charged off by your lenders. That means the  lenders write them off their books as bad debts, but they can still try to collect on them.

At the same time, you will build up your savings account. At that point, the company will negotiate settlements on your debts-sometimes as low as 25 cents on the dollar, but usually in the 50 percent to 75 percent range.

Under most programs, you will be completely out of debt (at least unsecured debt) in anywhere from twelve to thirty-six months depending on your total debt. Twenty-four months is a typical program. Your total payoff will usually be 50 percent to 60 percent of the amount of debt that you entered the program with, including the fees charged by the settlement company.

So if you have $20,000 in debt, you might enter a debt settlement program calling for two years of $500 monthly payments. After twenty-four months at $500 a month you would have paid $12,000 including fees to settle your debts, or just 60 percent of the $20,000 originally due. Of course the final numbers will depend on your individual situation but the plan can work in certain cases.

A few things to keep in mind about debt settlement:

• You need to make sure the money you send in for your savings account to settle your debt is held in a separate trust account away from the debt settlement companies’ operating funds.

• You’ll want the company to handle calls from creditors. In most cases, they will get a limited power of attorney to be able to communicate with your creditors for you. This can alleviate the harassment you may be experiencing if you are falling behind.

• Many consumers in a hardship situation are able to get those taxes waived by the IRS, but you’ll want to get advice from a tax professional.

• Debt settlement is for consumers in a hardship situation, not for those who just don’t want to pay back their debts or pay high interest rates. The debt settlement company should qualify you based on your financial picture.

One of the most common fears people face when considering debt settlementis the fear that they are somehow immorally wiggling out of debts they legitimately owe. Don’t be so harsh on yourself.

First of all, there is nothing immoral about paying back as much as you can. Life happens and people run into problems. The credit card companies know, when they extend huge credit lines and hike up interest rates to percent plus, that some people won’t be able to pay them back. They are still enormously profitable.

Secondly, if you are in a hardship situation and don’t take this step, then your next option will likely be bankruptcy. In that case, your creditors may get nothing.
So do what you have to do. Pay what you can. Then get on with your life so you can focus on building wealth, which benefits our entire economy (including the credit card
companies!).