Debt management agencies like Freedom Debt Relief offer a wide variety of assistance to people who are in need to solve their debt issues. One such option is debt reduction. Basically the concept is to negotiate a reduction on the amount you owe to your creditor at an amount that ideally you can afford so that you can still pay off your debts to that particular creditor. Of course, to assume that you could get your creditor to reduce that debt to a very small amount may not be a smart thing to do. This is because creditors generally may be willing to reduce the interest rate rather than reducing the amount of your original debt before including the interest. However, you may still attempt to get them negotiate to reduce your debt in total instead of merely reducing the interest rate.

Many debt management services may act on your behalf to negotiate a reduction. Some even promises to be able to successfully negotiate a reduction of up to 50%. This may depend on the experience of your negotiator and also the severity of your financial situation. Banks and lenders would still prefer to at least recover some of the amount you owe rather than losing all of them which is why they may be willing to settle the account for a significantly less amount than what is originally owed if your financial situation is so bad that they would stand to lose more if they insist that you pay the amount in full. The success of the negotiation may also depend on the amount you owe and also the age of your outstanding obligations.

In many cases, debt reduction negotiators may make a full assessment of the total debt including credit cards and other unsecured loans. Basically the information about your debts may help them determine the best approach to win over your creditors into allowing a significant reduction of the amount of debt you owe them. Generally negotiators may try to negotiate a reduction of the total amount owed if the debts in question are credit card debts. This may help even more if you could prove that you are having significant difficulty in paying your credit card bills and if the creditors would not give their cooperation you may have to stop paying altogether or file for bankruptcy. Creditors generally hate it when their debtors file for bankruptcy because they stand to lose more than gaining anything.

Once your debt is reduced you may be required to either pay the reduced amount in one lump sum or in installments as agreed by your creditor and your negotiator. Many creditors would prefer a lump sum payment especially if they reduced your total debt amount significantly. If your negotiator manages to convince them to agree to a new repayment schedule you may be required to strictly follow the schedule and you are not to miss one single payment at all or else the reduction discussion could be void. Often your negotiator may ask that you make one single payment to the agency and they in return would distribute the money to your creditors according to the agreed monthly payment amount. Of course, the agency may or may not charge you any fees for their assistance but many agencies are non-profit agencies so they may only charge you for administration costs.

A debt reduction may generally help you pay off your debts but you may want to bear in mind that it may go into your credit report and would likely affect your credit score. You may also be taxable for the reduced amount as it is considered to be a forgiven amount. It is advisable that you make sure all the necessary paperwork is in order so you may not face any problem with your taxes later on.

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Category: Finances
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