For better or worse, debt settlement is a very popular option these days. Given this, you might be wondering if debt settlement is the right option for you. You may be asking yourself, "Does debt settlement work?" "What is debt settlement?" "What are the consequences of settling a debt for less than you owe?" "Is it worth the risk?"
Let's address each of these questions, one-by-one:
What is Debt Settlement?
Debt settlement is the process of negotiating with creditors (usually credit cards) to pay less than you owe for the purpose of discharging a debt. For example, if you owe $8,000 on a credit card and have fallen months behind in payments, the credit card company may allow you to pay 75% or even 50% (or less) of the balance and forgive the remaining debt. To qualify for a debt settlement arrangement, the creditor may require you to have the settlement amount in a lump sum or pay it over a short period of time (usually less than a year). Although credit card companies almost never settled debts in the past unless a debtor was declaring bankruptcy, times have changed. With so many people behind on their bills these days, credit card companies are finding that getting something is better than nothing.
The Consequences of Debt Settlement
First of all, settling a debt will damage your credit. Although banks probably won’t agree to consider debt settlement unless you are already significantly behind on your payments (at least two to three months), a settled debt may appear on your credit report as a charge-off, which is far worse for your credit than a few months of late payments. However, with the right procedure, you can repair your credit in a fairly short amount of time (usually, within a year). Although not as bad as bankruptcy, settling a debt will impair your credit.
Second, creditors must report canceled debts to the IRS using form 1099. So if a credit card forgives $2,000 of your debt, you may owe taxes on that $2,000 just as if somebody wrote you a check for the amount…unless you can prove that you are insolvent. There is an “insolvency” rule in IRS Publication 942 that governs taxes and bankruptcy. Even if you’re not filing bankruptcy, if you owe more money than you have (i.e., have a negative net worth), you may qualify as insolvent and may not have to pay taxes on forgiven debts. That said, if you settle a debt you should seek professional help with your taxes that year.
The Bottom Line: Is Debt Settlement Worth It?
If you’re drowning in debt, debt settlement may be able to get you out from under your debt for less than you currently owe. If you have some money stashed away and have already damaged your credit (or aren’t worried about damaging your credit), then it’s a viable option. To get started, call your creditors (or wait for them to call you; if you’re late, they will). Ask them vaguely if there is any way they might be able to reduce the amount you owe if you can come up with a full payment quickly. Yesterday’s times article indicated that at some credit card companies, it doesn’t even require a supervisor to get the debt settlement ball rolling. Reps at other banks may not be able to help, so you’ll have to ask for a supervisor. Be persistent, and negotiate. If they offer to settle your debt for 80%, tell them you’d consider 50% and go from there.
If you are not having any luck in the debt negotiation game, consider hiring a company to do the negotiations for you. Although you will have to pay a fee (usually around 15% of the debt itself), you will still save far more money that having paid the debt in full, usually around 50% of the balance. For a free consultation, check out RAM Financial Services, or call one of their Consumer Advocates at 866.572.4310.
Looking for debt relief? Check out Curadebt.
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