Usually, the best time to consider debt settlement is an option when your debts have been charged off by the original creditor and sold to collection agencies. There is no guarantee that any collector will settle on an amount satisfactory to you. If they have an attorney acting as the collector, they may be overly difficult to settle with. Larger collection agencies are usually easier to negotiate a settlement with, because they have purchased your debt at a lower number, and you are likely to be just another small client to them.
Pros and Cons
There are some benefits to debt settlement. You can satisfy your debt in full and pay less, sometimes much less. This process can save you 50% or more. Some collectors will even agree to non-report any negative information on your credit report. Additionally, your open delinquent item on your credit report will go away. Debts resolved through settlement are no longer are subject to collection calls and legal action, which removes that incredible headache.
There are negatives to debt settlement. Individually, many of these will appear on your credit report as a settled debt rather than paid in full. This should be a real focus for you. How your settled debt is reported to the credit bureaus is of the utmost importance. Negotiate this item like it was money and give up a few extra dollars to get a paid in full statement on each account.
Savings from non-payment are reportable to the Internal Revenue Service (IRS) as forgiven debt, which is considered a form of income. Collection agencies are required to submit Form 1099-C to the IRS to report any forgiven debt of $600 or greater. Seek the advice of a professional tax preparer, as there are many conditions whereby this does not have to have an impact.
If you seek the aid of a debt settlement negotiator or company, be aware of potential problems. Debt settlement companies will want to charge substantial up-front fees, and also charge monthly fees. They sometimes hold monies until they have all their money, and send nothing to your creditors until you have accumulated enough to settle. Then they further exploit you by taking a portion of the forgiven debt as a fee. Your credit rating is almost certain to be ruined. Debt settlement companies cannot do anything more than you can do on your own. Remember that. You can do as much as a debt settlement company. Heed the warnings from top regulators regarding debt settlement companies.
There are real complaints about real predatory companies. If you decide to settle on a debt, try to do it yourself. The key is to get enough money to pay off the settled amount in one lump sum payment. Collectors will very likely not accept payments to settle a debt. Some collectors will settle a debt for as little as 25% of the balance if you have cash to pay, but expect most to require 40-60%. This number has gone down as we have faced our economic challenges in America. Take advantage of this fact. Absolutely make sure you get a written contract showing that the total debt is satisfied upon your agreed payment. If you can, also get the collector’s written agreement to remove any negative credit reference on your credit report for that debt..Like I said, give up a few dollars for this one. Not all collectors agree to this, but would certainly listen if you add a few bucks to the settlement.
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