Research has shown that about 10 million South Africans are struggling to repay their debt. What many of these individuals fail to do is communicate effectively with their creditors, once they find themselves in trouble. The National Credit Act has provisions that protect consumers. One of the ways in which individuals can manage their debt is through debt settlement.

Debt settlement is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full. It essentially involves paying a creditor less than the actual amount that you owe.

The process does affect your credit score, and will have an adverse effect on your overall score. It has a negative impact on your future ability to borrow money at an affordable interest rate.

Normally, only unsecured debts can be settled.

How does it work?

Once you’ve decided that debt settlement is your best option, make sure that you contact your creditors quickly.

Be prepared to show your financial records. Your creditors will want convincing proof of your hardship. They won’t want to offer concessions to individuals that just want a deal.

You need to set payments at a level which you can manage financially. Make sure that you can keep up with the schedule. Keep in mind that a debt settlement generally requires you to come up with a substantial amount of cash at one time.

You can choose to initiate this process yourself or you can arrange for a debt settlement company to assist you. If you choose the latter, the consumer makes monthly payments, out of which the debt settlement company takes its fees for the legal work or negotiation and payments are paid to the creditor.

Once you’ve settled the debt, this will hurt your credit score for two years, but you will then have financial freedom once again, knowing that you no longer owe anyone.