The term “debt mediation” refers to the process of negotiating with creditors to pay less than the total amount owed to settle the debts. It is a debt reduction or debt elimination strategy for individuals who are in over their heads financially and who do not expect to have the means to pay their debts in full.
Some people attempt to perform their own mediation and negotiating – but others have found hiring a debt mediation company offers better results.
What Do Debt Mediation Companies Do?
If you work with a debt mediation company, they will contact each of your creditors and attempt a number of credit negotiations to settle the debts for less than the total balance you owe. Many debt mediators claim to reduce your debt by 40 or 60%.
When you work with a debt mediator, you will receive far less phone calls from your creditors as they will be asked to work with the mediator representing you instead of calling you directly. Most debt mediation companies will request that you legally authorize them to represent you in negotiations with your creditors – which is done through a Limited Power of Attorney document.
Why Do Creditors Agree to Settle?
If your creditors begin to think you are near filing bankruptcy – they understand that they could receive very little money – at times, nothing at all. Most creditors would prefer to work with you to receive a percentage of the balance rather than risk receiving nothing at all.
What Happens in the Debt Mediation Process?
If you choose to work with a debt mediation company, you will make a monthly payment which is saved into a trust account. Each month, you deposit additional money while the debt mediation company contacts your creditors to negotiate a settlement payment of less than the total balance owed. When a creditor agrees on an amount of money to accept as a settlement, the funds are taken from the trust account you have been paying each month. When the creditor accepts the payment, the account is considered paid-in-full and the account will be closed.
The process of debt mediation can take anywhere from 12 to 36 months, and you tend to damage your credit further while it’s taking place. Once you begin working with a debt mediation company, you stop making payments to each of your creditors and deposit the money into the trust account. In the meantime, your credit report may be updated to include all of these late payments, but for most people considering debt mediation – you’ve already had a number of late payments and no hope for getting back on track without some sort of drastic method.