Debt Settlement Help
by Andrea Lott
If you have trouble paying your unsecured debts, such as credit cards or medical bills, but do not want to declare bankruptcy, consider debt settlement as a possible solution. Debt settlement negotiates your bills to a smaller amount, and the creditor agrees not to pursue collection of the remainder. Firms will help you settle debt for a fee, or you can do it yourself without representation.
If you have decided to try to settle your debts, stop paying on your accounts, which will accelerate the process of sending the accounts to collections, either within the company or through a collection agency. If your creditors call, tell them about the circumstances that are making it difficult for you to pay your debts, such as a job loss, medical problems or income changes. Note, though, that any information you give can be used by the creditor in attempting to collect the debt.
If you have saved some money by not making your usual payments over the course of a few months, ask if the creditor will accept that sum as payment in full. Depending on your circumstances, how long you have been paying the account and the standards of the individual bank, creditors typically accept a lump sum payment of 20 percent to 80 percent of the total debt.
Offer the creditor a lower amount than you might eventually by willing to pay to begin negotiations, and be prepared to consider a counter proposal. If the credit card company is not willing to accept an amount you can afford, try again in a few months.
Get any settlement agreement in writing before making a payment, then make the payments as directed or risk voiding your settlement agreement. Once the account has been settled and paid, make sure that the creditor reports that the account has been "paid as agreed" to the credit bureaus.
When you settle a debt, the creditor reports the amount you don't pay, or the amount "forgiven," to the IRS as a loss to them and income to you. When you file your annual return, you may be required to report forgiven debts as income and pay taxes on that amount based on your tax bracket, unless you can prove to the IRS that you were insolvent at the time of the settlement, which means the total value of your debt exceeds the total value of your assets, including your home, retirement accounts, investments, possessions and banking account balances.
As with every option for consumers who are experiencing difficulty with debt, debt settlement has advantages and disadvantages. To convinec your creditors to consider debt settlement, you will need to be a few months behind on your credit payments. Because paying bills late can adversely affect your credit score, this strategy can damage your credit rating. So if you are planning to try to settle your debt, you probably won't be able to acquire additional debt, such as buying a new house or car, in the near future.