Possible Legal Repercussions of Debt Settlement

Debt settlement is the process of paying off a loan with a lump sum payment, at a lower balance than is owed. Many lenders prefer debt settlement to bankruptcy because it is a faster way of settling the outstanding balance. Debt settlement may have legal repercussions of its own, however.

Breach of Contract

You are breaking a contract with a lender when you modify a loan in any way. Some lenders will extend this option based on the circumstances, but others will fight to preserve the initial terms of the loan. Create a new contract with the help of a debt settlement company that supersedes the existing contract, or you may be sued for breach of contract in the future.

Violation of Other Loan Agreements

If you have other loan agreements, particularly subordinate loans, you may be violating those contracts because they often have clauses precluding you from altering your debt owed to other lenders. Check your loan contracts to make sure you are not in violation when you settle another loan. An attorney may be required to keep you out of legal trouble. 


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