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Debt Settlement: What it is and what are the risks?

Posted Date: 27-03-2023 Posted By: user

NPA Debt settlement comes into play when there are many late or defaulted payments and collections accounts.

When a borrower cannot pay the full amount that he has originally agreed to, the credit scores will have been shredded.

Among several processes that improve the NPA situation, debt settlement companies negotiate with creditors to reduce liability. It is mostly on unsecured debt, e.g., credit cards.

This option is not for every type of debt. For example, a house loan, a car loan, or a student loan, and so on.

Settlement offers work only if it looks that the borrower won’t pay at all. Once the settlement company believes that the account has sufficient to offer a lump-sum proposal, it negotiates on behalf of the creditor to accept a smaller amount. Debt settlement has been found an effective tool in reducing npa in india.

Some debt settlement companies claim that they can reduce your debt by 50% and get you debt-free within 36 months. But is the process as clear-cut and easy as it sounds? Well, it is not.

The path of NPA Debt settlement is not very easy. There are many debt settlement risks that need to be considered. What are they?  Let’s understand it.

Debt settlement risks

The credit will take a hit

If divert debt payments toward the settlement account, then it will hit your credit report. It is because you will have to keep them on record for seven years.

Penalty charges and interest will remain the same

You will get hit with penalties and interests. They will continue to accrue. Interest will also keep racking up on the balance. Those, who are tracking npa in india have found no change in the interest and penalty ratio.

No success guarantee

There is no guarantee of success that the debt settlement company will resolve your debt for significantly less. Some creditors will not negotiate with them.

There has been a research done on the effectiveness of the debt settlement process, which indicates that most consumers would have to settle at least four accounts if they want to receive a net benefit. Not just that, debt totals may rise as fees accrue. The companies need to do aggressive collection attempts during negotiation.

You need to pay a fee while settling debt

Companies cannot charge fees upfront to the customers. But they will definitely charge a percentage. It depends on the debt balance when you enrolled in the program. Some charge a percentage of the debt eliminated by settlement.