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Debt Settlement Laws

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What is a Debt Settlement?

Debt settlement refers to an attempt between a lender and a borrower to resolve outstanding debt payments in the event that the borrower has missed payments.  In most cases, the parties may formulate a debt settlement agreement that outlines how the debt settlement is to occur.

For instance, the agreement may create an alternative payment plan for the borrower, in consideration of adjusted income or other factors.  It may also spell out whether the parties can file a lawsuit in the future, or if the lender can levy on the borrower’s property in exchange for the payments. 

How is a Debt Settlement Accomplished?

Before a debt settlement agreement can be reached, the will generally need to work their differences out.  This can be done through:

  • Private negotiation
  • Court-monitored mediation
  • A formal lawsuit

Using these types of dispute-resolution methods, the parties may then choose to submit their final debt terms to a court to have them approved.  This will give the settlement agreement the formal authority of the court and can help the parties enforce the terms in the future. 

What are Some Legal Issues Involved in Debt Settlements?

Perhaps the main issue in most debt cancellation disputes is that of breach of contract.  Lending arrangements are usually done through a contract, and so the debt arises mainly due to a breach of the contract.  A common example of this is where the borrower violates terms of a mortgage contract and fails to keep up with mortgage payments.  The violation may then fall under breach of contract laws.

Another common legal issue involved with debt settlements is that of third party rights. Sometimes debt settlement is accomplished through the intervention of a third party paying off the borrower’s debts.  This may require another contract that spells out the intervention terms.  If no contract is made, it may actually be a violation of the original lending agreement.

What are Some Outcomes of Debt Settlement Disputes?

Debt settlement disputes typically result in a damages award to reimburse the lender for losses.  However, in most cases, the borrower may be insolvent (unable to pay due to lack of funds); that is why the debt arises in the first place.  In such instances, the court may issue a lien allowing the borrower to obtain title to the borrower’s property, in an amount worth the value of the debt.   An example of this is where the bank forecloses on a home and takes possession of it if the homeowner fails on their payments.

Thus, debt settlement disputes can often result in a major rearrangement of the borrower’s finances and budgeting.  Such disputes typically require the assistance of a lawyer to deal with the various legal issues and documentation involved.

Do I Need a Lawyer for Help With Debt Settlement Laws?

Each state has different debt laws, and some jurisdictions may enforce stricter measures than others.  If you need help with a debt settlement dispute, it may be in your best interests to hire an experienced lawyer for assistance.  A qualified lawyer in your area will be able to assist you with your claim, and can represent you in court if a lawsuit needs to be filed.

Photo of page author Ken LaMance

, LegalMatch Law Library Managing Editor and Attorney at Law

Last Modified: 12-20-2012 04:14 PM PST

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