Debt Settlement To Reduce Debt: Pros and Cons
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About Debt settlement. Debt settlement is
one solution used to reduce your outstanding debt.
Either you or a third party negotiates with the creditors to lower payments and in some cases reduce the total amount of debt.
Be prepared. You may be taxed on cancelled/forgiven debt, i.e. you may receive a
1099-c cancellation of debt notice. Creditors and debt collectors who agree to accept at least $600 less than
the original balance are required to file the 1099c forms with the IRS. You as a taxpayer
must report that on your Federal Income Taxes as income.
Whether a borrower decides to settle debts directly with lenders or through professional debt settlement companies, they will have to set aside a certain sum of money to build up a settlement fund. The debt settlement company will require a limited power of attorney to act on behalf of the borrower and negotiate with the lenders.
After collecting a certain amount of money the borrower will negotiate with the lender to agree with the reduced payment amount. The negotiation amount generally varies from 25% to 50% of the outstanding balance, however some claim to reduce your debt by 70%. Once the lender agrees to the settlement amount the payment is arranged for making a full and final settlement.
Monthly payments can be made into the settlement fund to pay off the debt amount agreed upon. The lender then sends a letter to the borrower and the credit bureaus stating that the amount has been settled for less than the agreed amount.
Usually unsecured debts such as medical debts, credit card debts and others are negotiated in such a manner. In case of secured loans the lender has the right to seize the security in lieu of such loan.
Most third party debt settlement companies charge fees and it is not always apparent how much they charge so beware and read the agreement entirely and watch
for hidden fees. However, you don't need to hire a professional to do this for you. Debt settlement has become so common and popular that many of the major credit
card companies will offer settlements in order to cut their losses. Some settlements have been as high as 50% of the outstanding debt but the
average is less than that. Using the do it yourself approach requires that you
learn how to negotiate.
If you don't settle after a few months of delinquency, your account may be turned over to a
collection agency or you could be sued by the creditor. A judgment resulting from a lawsuit will appear on your credit report and could stay there as long as 10
years. Debt settlement will not appear on your credit report. However, if you are already delinquent on your payments, then your credit may already be impaired.
The advantage of debt settlement versus debt consolidation is that
you will reduce your bills, instead of paying off your regular amount owed. With debt consolidation you just combine all your bills, rolling them into one,
and paying one monthly installment.
The disadvantages of debt settlement are it could affect your credit score
and the canceled portion of the debt is reported to the IRS as income. The
IRS views the settled debt the same as receiving a cash gift or income. Check with a tax advisor.
However you pay much less is taxes than you would in interest.
While debt settlement does get recorded on your credit report,
it is usually considered less damaging to your credit than bankruptcy. The debt consolidation and debt
settlement organizations might assist you in relieving you of but they cannot free you from debt completely.
After debt settlement /negotiation
Debt settlement affects your credit score. Once you have settled debts you need to turn your attention to repairing your credit. The faster you clean up your credit report the quicker you can improve your credit score. Then focus on rebuilding your credit history. You should also monitor your credit. Read more about fixing and improving credit...