Debt Settlement

Debt settlement or debt negotiation can be used once all of your credit cards have been charged off and turned over to outside collections agencies. It can help you find a resolution to outstanding debt that is no longer tied to an open source of credit.

If you still have credit card debt that is still with the original creditor, then you may wish to contact a credit counselor instead. As long as the debt has not been charged off, you can get usually better benefits through credit counseling.

Avoid Potential Judgments

Once the accounts have all been turned over to collections, then you can negotiate a settlement with each collection agency. A settlement can bring an end to collection calls from that collector and an end to the letters. Collection agencies that agree to a settlement will drop any potential plans to sue you in court over the debt. If you receive a summons to court for one of your collection accounts, a settlement may still be a possibility. If you want to do so, you must contact them quickly and then follow through on your actions.

No Payment Plans Accepted

If there is one thing virtually all debt collectors agree on, it’s that settlements must be paid up-front. Debt collectors do not accept payment plans on a settled amount. If you settle a $2,000 debt for $1,000, you must be able to send them a check for $1,000. Otherwise, a payment plan may be agreed to where you would pay back the entire $2,000 plus interest. The bright side is that you can close out the debt once and for all for less than you owe.

Your Taxes Could Increase

When a debt collector agrees to settle the debt for less than you actually owe, you are having a portion of the debt “forgiven.” This forgiven debt is actually viewed by the Internal Revenue Service as a form of income. In fact, debt collectors are required by the IRS to automatically report any forgiven debt of $600 or more on a 1099-C form. This could increase your federal and state taxes. If you are due a substantial refund, this forgiven debt could wipe out much of the refund you were expecting. Make sure that you understand any potential tax consequences that could result from a settlement.

You Can Negotiate Your Own Best Deal

Debt settlement can be done without utilizing a settlement company. You can do it yourself once you understand how it works. If you really want the services of a debt settlement company, understand that their costs could potentially exceed 50% of the debt savings. A reputable debt settlement company will have a satisfactory rating with the Better Business Bureau.

Debt settlement or negotiation can help you move on from an old debt, but it will not totally clear up your credit. The late payments will stay on your credit history for 7 years. The good news is that now the account will be shown as closed. For additional information on debt settlement, please see the following resources:

Alternatives to Debt Settlement

The Pros and Cons of Debt Settlement