Debt settlement might be appropriate for you if you’re facing a mountain of debt.
Although it can significantly reduce your debt,
it does have an impact on your credit rating and your taxes.
What Is Debt Settlement?
Debt settlement, also called debt negotiation, is a process by which your
lenders agree to forgive a part of your balance, saving you up to 60% of what you
owe. You then only have to pay the new agreed-upon sum. In some cases,
you continue to make monthly payments, in others you must make a lump-sum payment.
The forgiven balance is considered taxable income by the IRS. In addition,
the settlement will be noted on your
credit report.
How Do I Get a Debt Settlement?
You can negotiate directly with your creditors, or you can hire a debt
settlement service to negotiate for you. In most cases, professionals will
have better luck negotiating a settlement
than individuals. They know how much each creditor is willing to settle and
what terms they’ll agree to. They also know which creditors won’t settle debts.
Creditors are not required to negotiate, so you should be prepared to do some strong
negotiating if you decide to attempt it yourself. Avoid pulling your emotions
into the conversation – treat it like the business transaction it is.
What are the Benefits of Debt Settlement?
A reduction in your total debt is the
biggest benefit. If your debt is so large that you can’t pay it off and are
facing bankruptcy,
this is a less harsh option. Although your credit will
be dinged, it won’t be as severe as it would be with a bankruptcy.
What Kinds of Debt Can Be Settled?
Credit card debt settlement
is probably the most common; however medical debts and other personal loans can
also be settled. Mortgages, car loans, and other secured loans can’t be settled
because they are backed by collateral that the creditor can claim. Student
loans also can’t be settled due to Federal law. If you’re struggling with
student loans, contact your lenders to request
consolidation, deferral, or forbearance.
What Are the Alternatives to Debt Settlement?
The best option is to pay off your debts
in full. Debt consolidation
can help reduce your interest rate or make your payments more manageable without
reducing your balance or damaging your credit. You can consolidate with a
personal loan or with a home equity loan, if you own a home worth more than your
mortgage balance.
Credit counseling
agencies also offer debt management plans. Often debt management
incorporates debt consolidation,
but your counselor will also negotiate for greatly reduced interest rates and possible
forgiveness of late charges. You make a single monthly payment or a lump-sum
payment to the credit counselor, who then pays your creditors as agreed.
Before you consider settling your debt, see if
debt consolidation or management will work for you. When it comes to
your credit, it’s always better to pay as much as you can.