When you're drowning in debt, behind in payments, running out of options, and don't know what to do, debt settlement may be a good option for you to consider.
It isn't for everyone, and there are some consequences to take into consideration, but it may be the option standing between you and bankruptcy.
In this article, I'll review the following consequences of negotiating a debt settlement with your creditors: • Not every debt is eligible.
• Debt settlement companies charge fees for their services.
• There are high drop out rates in these programs.
• Creditors will want a lump sum payment.
• It damages your credit.
• The savings is considered taxable income.
Not Every Debt is Eligible There are many loans that are exempt from debt settlement - as well as from bankruptcy.
Student loans are an example.
So, don't consider this an across-the-board solution for you to get completely out of debt.
As a general rule, you can only negotiate a settlement on an account that has been charged off.
So, unless you are very, very behind in payments, you may not be eligible at all.
Debt Settlement Companies Charge Fees Because they are providing a service, they charge fees.
Usually these fees are high, and can be as much as 25% of your debt.
You also have to make sure you are using a legitimate company, and one that has built up a good reputation with a wide variety of creditors in order to negotiate the best deal for you.
Be aware that the debt settlement company will not send any of your payments to your creditors until you reach a certain amount.
That means you can still receive collection calls and letters - or worse, you can still be sued by your creditor.
High Drop Out Rates This is not an overnight solution.
You will still be making monthly payments.
But, instead of making them to your creditor, you will instead be making them to a debt settlement company.
Many people who take advantage of these services have still not learned how to budget, manage their money and live within their means, so it isn't uncommon for a person to continue piling up debts with other creditors because they suddenly have lower monthly payments.
When they get behind yet again, they drop out of the program losing all of the money they had invested to the debt settlement company (because they will take that as their fee), and have not only their original debt, but the new debt they have incurred as well.
Lump Sum If you opt to negotiate with your creditors on your own rather than use a debt settlement company (and that's what I would recommend!), you will not be able to make monthly payments.
They will want a lump sum payment.
A good time to consider debt settlement is tax time (assuming you are getting a refund).
When you receive your refund, you can contact your creditor and offer a lump sum payment for anywhere from 75% to as little as 25% of the total amount due.
The advantage here is one payment and you can cross this creditor off your list, the debt is gone.
Damages Credit If you're like me, you probably consider this one a little bit silly.
After all, if you have accounts that have already been charged off, chances are your credit isn't very good now.
So, will having a debt settlement on your credit record hurt you any worse than the charge offs and late payments? Probably not.
But, it isn't the same as your credit report saying "paid in full".
I would say you just need to weigh your options.
For most people who are eligible for debt settlement, it's probably worth it to get out from under your debt.
Any negative marks on your credit will drop off, but it may take 5 to 7 years for that to happen.
In general, your more recent (past 2 years) credit history will be given more weight than the distant past.
Tax Consequences This often comes as a surprise to people who take advantage of debt settlement.
The forgiven amount is considered taxable income by the IRS and by many states.
So, if you owe $30,000 and are able to negotiate a 50% settlement, you will receive a 1099 from your creditor at the end of the year for $15,000 of forgiven debt which you will have to add to your taxable income on your tax return.
Again, a pretty small price to pay.
Even if you are in a higher tax bracket and pay 40%, you'll still be saving $9,000.
Just make sure you prepare for that extra hit at tax time.
Again, debt settlement isn't right for everyone, and it should only be considered as a last resort in order to avoid filing for bankruptcy.
But, it is an option worth considering if you are deep in debt and looking for a way out.
It isn't for everyone, and there are some consequences to take into consideration, but it may be the option standing between you and bankruptcy.
In this article, I'll review the following consequences of negotiating a debt settlement with your creditors: • Not every debt is eligible.
• Debt settlement companies charge fees for their services.
• There are high drop out rates in these programs.
• Creditors will want a lump sum payment.
• It damages your credit.
• The savings is considered taxable income.
Not Every Debt is Eligible There are many loans that are exempt from debt settlement - as well as from bankruptcy.
Student loans are an example.
So, don't consider this an across-the-board solution for you to get completely out of debt.
As a general rule, you can only negotiate a settlement on an account that has been charged off.
So, unless you are very, very behind in payments, you may not be eligible at all.
Debt Settlement Companies Charge Fees Because they are providing a service, they charge fees.
Usually these fees are high, and can be as much as 25% of your debt.
You also have to make sure you are using a legitimate company, and one that has built up a good reputation with a wide variety of creditors in order to negotiate the best deal for you.
Be aware that the debt settlement company will not send any of your payments to your creditors until you reach a certain amount.
That means you can still receive collection calls and letters - or worse, you can still be sued by your creditor.
High Drop Out Rates This is not an overnight solution.
You will still be making monthly payments.
But, instead of making them to your creditor, you will instead be making them to a debt settlement company.
Many people who take advantage of these services have still not learned how to budget, manage their money and live within their means, so it isn't uncommon for a person to continue piling up debts with other creditors because they suddenly have lower monthly payments.
When they get behind yet again, they drop out of the program losing all of the money they had invested to the debt settlement company (because they will take that as their fee), and have not only their original debt, but the new debt they have incurred as well.
Lump Sum If you opt to negotiate with your creditors on your own rather than use a debt settlement company (and that's what I would recommend!), you will not be able to make monthly payments.
They will want a lump sum payment.
A good time to consider debt settlement is tax time (assuming you are getting a refund).
When you receive your refund, you can contact your creditor and offer a lump sum payment for anywhere from 75% to as little as 25% of the total amount due.
The advantage here is one payment and you can cross this creditor off your list, the debt is gone.
Damages Credit If you're like me, you probably consider this one a little bit silly.
After all, if you have accounts that have already been charged off, chances are your credit isn't very good now.
So, will having a debt settlement on your credit record hurt you any worse than the charge offs and late payments? Probably not.
But, it isn't the same as your credit report saying "paid in full".
I would say you just need to weigh your options.
For most people who are eligible for debt settlement, it's probably worth it to get out from under your debt.
Any negative marks on your credit will drop off, but it may take 5 to 7 years for that to happen.
In general, your more recent (past 2 years) credit history will be given more weight than the distant past.
Tax Consequences This often comes as a surprise to people who take advantage of debt settlement.
The forgiven amount is considered taxable income by the IRS and by many states.
So, if you owe $30,000 and are able to negotiate a 50% settlement, you will receive a 1099 from your creditor at the end of the year for $15,000 of forgiven debt which you will have to add to your taxable income on your tax return.
Again, a pretty small price to pay.
Even if you are in a higher tax bracket and pay 40%, you'll still be saving $9,000.
Just make sure you prepare for that extra hit at tax time.
Again, debt settlement isn't right for everyone, and it should only be considered as a last resort in order to avoid filing for bankruptcy.
But, it is an option worth considering if you are deep in debt and looking for a way out.