The question of whether or not debt settlement can wipe out your debts depends on what type of debts you have and how deep in debt you are. For many people, the simple answer is yes.

Certain types of debts cannot be wiped out with debt settlement. These types of debts included secured loans, student loans and other types of debt. For instance, you cannot use a debt settlement company in order to wipe out your auto loans.

What is Debt Settlement?

Debt settlement is the process of debt negotiation. You can hire one of the debt settlement companies to take on your case. They will basically assume your unsecured debts and have you pay the debt settlement company directly on a monthly basis.

When you sign up for debt settlement, you will list all of the unsecured loans that you would like to include. This can include certain medical bills, unsecured loans and credit cards.

A debt settlement company will most likely have you sign a contract with them so that all of the details can be lined out in a contract. In this contract, the amount that you will pay the debt settlement company each month will be detailed. It will also state how long it will take the debt settlement company to pay off your debts and how long you will be obligated to continue paying them.

Using a debt settlement company can be a win-win situation. You win because you pay less per month than you were previously paying and you also win because you have a defined period of time and a plan to pay off your unsecured debts.

The debt settlement company wins because they make money. How do they make money? The easiest way to describe how a debt settlement company makes money is through the following example:

Assumptions

1) You have $50,000 of unsecured debt that you want to wipe out.

2) Your current minimum monthly payments total $1,500

How Debt Settlement Works

The debt settlement company takes on your case and you sign a contract with them and agree to pay them $1,000 per month. Keep in mind that if you were still paying $1,500 per month, it would take 30 to 50 years before you could wipe out your debts.

The debt settlement company then contact each of the creditors that are listed in the contract. They attempt to negotiate a better deal with them on your behalf. They are very good at this.

The creditors are well aware of the fact that if they don't give in and deal with the debt settlement company, you could simply file for bankruptcy and then the creditor would probably get nothing.

Therefore, the creditor gives in and settles for a better deal. They may cut the interest rate and/or forgive a portion of the debt.

When the debt settlement company has finished contacting each of your creditors, the new minimum monthly payment may go from the previous $1,500 down to a mere $700.

Then the debt settlement company figures out how much they need to pay your creditors above the minimum monthly payment so that your debts can be wiped out in the prescribed amount of time.

For this exercise, let's assume that they decide that they need to pay your creditors a minimum monthly payment of $850. Therefore, the difference between how much you are paying the debt settlement company ($1,000 per month) and the amount that they are paying your creditors ($850 per month), becomes the profit of the debt settlement company.

Just keep in mind that this is a very simplistic example of how some of the debt settlement companies work. It is a good idea for you to investigate each of the debt settlement companies that we suggest before you leap into any particular plan of action.