Why Settlement Works
Many people are unable to believe the claims they hear from debt settlement companies. They don’t believe that a bank is going to accept 20-60% of what they owe. This is a bit of an illogical practice, but there are several reasons why settlement works.
First, your accounts fall delinquent while you are on a settlement program. To a creditor, it looks like you are maybe having some sort of problem with your job or some other hardship. It has been statistically proven that someone who falls more than 90 days behind on their bills is never going to catch up. Because of this the creditor will charge off or sell your debt to a collections agency for pennies on the dollar around the 90-120 day mark. The original creditor is able to recoup a little bit of their loss and can write the remainder off on their taxes.
So the account is now in the hands of a third party collections company. They have purchased the account for as low as 10-15 cents on the dollar. Statistically, they know it is going to be difficult to get money from you. So when your negotiator calls up and makes them an offer of 40% of the original balance (which is probably 2-4 times what they paid for the debt), they are probably very likely to accept that settlement. If not, the negotiator can let the account sit out a little longer and try a similar offer again.
The settlement percentage obviously depends on a number of factors including the original creditor, the collections company, the amount and so on but this should give you a general idea of how and why settlement works.
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