How does Debt Settlement work?
The debt settlement process is fairly simple. When you sign up for a debt settlement program, most companies will send you out paperwork to open a trust account in your name. You will stop paying your creditors and begin to pay funds into this trust account on a monthly basis. While funds are building in your trust account, your program accounts will fall behind and eventually charge-off. A charge-off occurs when your primary creditor (Citi, Discover, etc.) sells the debt off for a fraction of what is owed to a collections company. This charge-off allows your creditors to make back some money and write off the debt on their taxes.
When the balance in your trust account reaches approximately 50% of the balance you owe, your debt negotiators will begin calling your creditors to negotiate balances. When a settlement is reached, depending on the percentage and your agreement with the company, you will be contacted to approve the settlement. After your approval, the funds will be taken out of your trust account and sent to the collection company. You will receive a letter of settlement and the account will show as settled with a zero balance on your credit report.
This process will be repeated as necessary until all your accounts have been settled.