Debt Negotiation
When a debtor is in enough financial strife that a creditor becomes concerned about obtaining payment at all, both parties may elect to reach an agreement to the debt(s) at a more affordable cost. This is referred to as debt settlement, as the creditor is settling for a smaller amount than what is wholly owed. This is also known as debt negotiation (although the "negotiation" is really the means of reaching a settlement).
The creditor and debtor both have their reasons for settling the debt at a lower cost:
The person in debt is trying to solve their financial circumstances without needing to declare bankruptcy. If they are unable to utilize a debt consolidation or credit counselling company to pay off what's owed, debt settlement is much less damning to their long-term credit than going bankrupt; and because the debt is paid back, halts harrassment for payment from the money lender and the other unpleasantness that comes from overdue bills.
For the creditor, accepting a debt settlement offer means they will usually obtain a larger amount than they would were the person in debt made to declare bankruptcy, and can actually save them money over utilizing collection agencies and/or attorneys fighting to gather the full amount. It also means they'll get payment sooner than later.
Several debt management companies use a mix of debt settlement and consolidation efforts whenever viable, lowering individual debts before amalgamating them into one debt at a lower interest rate.
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