What Is Debt Mediation?

Debt mediation allows you to sit down with your creditors and come to a mutually beneficial agreement about how to pay off your debts. This is done either individually or with a debt mediation service. The latter can help you get a better settlement, but it isn’t done for free. Much of what you save can be lost in charges levied by the debt mediation company that helps you.

Debt Mediation Process

Debt mediation works by lowering your interest payments to the concession rate — the lowest rate offered by the credit card company — and coming to an agreement on the amount of principal reduction. You can consolidate your debts into one monthly payment paid into a trust account that the debt mediation company then pays out to your creditors at the agreed-upon rates. This payment is pegged to a specific period usually between two and three years. This allows you to know when you will be out of debt and to tailor your monthly payment to that calendar.

Credit Rating Effects

One downside of debt mediation is that your credit rating initially plunges. Debt mediation indicates to future creditors that you have borrowed more than you can pay back. But once you start making regular payments, you begin to see your credit rating improve. Your credit rating significantly improves once you have paid off all your debts. Debt mediation allows you to turn negative spots on your credit into positives. Because these negative effects are temporary, they do not compare to the effects of late payments and rising credit balances. Late payments can affect your credit rating for up to 7 years.