Debt Settlement Facts
The process of settling on a debt involves
negotiating a lower payoff amount to resolve the outstanding
debt owed to a creditor. Debt settlement should normally not be
considered an option if the debt is still held by the original
creditor. If you are in this situation, and unable to bring the
account to current status, you should seek the assistance of a
certified credit counselor
in order to discuss options for restoring your account to
current status. Credit counseling is a process that can help you
improve credit and eliminate
debt.
Once your debts have been charged off by
the original creditor and sold to collection agencies, then debt
settlement may be an option you can consider. There is no
guarantee that a collector will settle. Some attorneys acting as
collectors may be particularly difficult to settle with. Larger
collection agencies are usually easier to negotiate a settlement
with.
Pros and Cons
There are some benefits to debt settlement.
You can satisfy a debt in full while paying less than the full
amount (make sure you get this in writing). This can save you a
substantial amount of money. Some collectors will even agree to
delete any negative information on your credit report, much to
the chagrin of the credit bureaus. In addition, you no longer
will show an open delinquent item on your credit report.
Furthermore, debts resolved through settlement and other means
no longer are subject to collection calls and legal action.
There is a dark side to debt settlement.
Many of these will appear on your credit report as a settled
debt rather than paid in full. If you fail to get a written
statement from the collector that you no longer owe anything on
the debt, they may sell the remainder to another collection
agency. In addition, any savings are reportable to the Internal
Revenue Service (IRS) as forgiven debt, which is considered a
form of income. Collection agencies are required to submit Form
1099 to the IRS to report any forgiven debt of $600 or greater.
If you have negative net worth, you may be able to avoid
taxation on forgiven debt. If this is the case, you should seek
the advice of a professional tax preparer.
If you seek the aid of a debt settlement
company, you may have even more problems. Debt settlement
companies charge substantial up-front fees, often charge monthly
fees and send nothing to your creditors until you have
accumulated enough to settle. At that point, they even take a
portion of the forgiven debt as a fee. Once your debts have
accumulated additional interest over time, and factoring in the
increased taxes you must pay on forgiven debt, you really are
not saving much money at all. Plus your credit rating is
guaranteed to be ruined. Debt settlement companies cannot do
anything more than you can do on your own. If you can save money
for a settlement and negotiate a settled amount, then you can
settle your own debts without the assistance of a debt
settlement company.
If you decide to settle on a debt, try to
do it yourself. The key is to save enough money so that you can
pay off the settled amount in one lump sum payment. Collectors
will not accept payments to settle a debt. Some collectors will
settle a debt for as little as 25% of the balance, but expect
most to require 40-60%. Make sure you get a written statement
showing that the total debt is satisfied upon your payment. If
you can, also get the collector’s written agreement to remove
any negative credit reference on your credit report for that
debt. Not all collectors agree to this, but some will.
Debt settlement should only be considered
if your accounts have been charged off and you are getting
hounded by collectors. You can save for and
negotiate your own
settlements without the assistance of a debt settlement company.
What is important is that you protect your financial future by
any means necessary.
Be sure to visit our
debt settlement blog if you want more information about how
debt settlement affects your credit and future liabilities.
© 2004-2008 Vision Credit Education, Inc. All rights reserved.
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