BankingDebt Settlement Information
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 Are the Drawbacks? Taxable income and damaged credit are the two main drawbacks to debt settlement. However, only the unpaid balance is taxable, and then only at your normal tax rate. That figure is significantly lower than the full debt would cost you.
If your debt problem was so severe that you had to request a settlement, then damaged credit may actually work in your favor. Because you’ll be unable to get new credit at favorable interest rates, it may be the motivation you need to learn to cut expenses and avoid taking on future debt.
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.
Source: http://www.bills.com/debt-settlement/