So, you're in over your head, and you're thinking about a process called debt settlement, in which your creditors agree to take less than the full amount you owe on your accounts. You've probably heard or read a lot of different things about debt settlement, and you're not sure if it's the right choice for you. You probably question everything you've heard and don't know what's true and what's not. So, let's try to explain how debt settlement works by starting with what's "bad."
Your creditors won't take less than what you owe them without you going through some pain. Don't even try to reach a settlement agreement with even one of your creditors unless your accounts are already past due. It won't happen. Period. Unfortunately, you can't negotiate a settlement until your accounts are past due for a certain amount of time. If you want to try to work something out while your accounts are current or even if they are 30–60 days late, I think you should. At the very least, you'll find out the truth and know that the end result won't be good. So, yes, this is one of the bad things about settling debts. Your accounts must be late, and your credit score will go down for a few months as a result.
You may have also heard that settling your debt could mean you owe taxes. True? Maybe. See, the IRS requires creditors to fill out Form 1099 for every cancelled debt over $600. Now, if you settle your debts, you may or may not have to pay income taxes. This is because there is a "insolvency" rule for people who are considered insolvent at the time of their settlements. To be considered "insolvent," your debts must be greater than your assets. If you don't know where you stand, you should talk to a tax expert to find out if this is the case for you.
Now that we've talked about the bad things about debt settlement, let's look at what's good about negotiating with your creditors.
Let's face it: if you're thinking about debt settlement, you're either having trouble paying your monthly bills or your bills are so far behind that you're considering bankruptcy. Debt settlement is a great alternative to filing for bankruptcy because it lets you get out of debt without making your personal information public record, which would happen if you filed for bankruptcy.
Also, the reported late payments on your different accounts will have a short-term effect on your credit score, but it won't be nearly as bad as if you filed for bankruptcy. If you've been paying your bills on time and your credit score has gone down because of debt settlement, it will go back up as your accounts reach zero balances. This will happen with each final settlement payment. Most people find that their credit score goes back up to between 600 and 700 between 6 and 9 months after they finish the debt settlement process.
Getting rid of your debt is probably the most important benefit of debt settlement. No more tossing and turning at night, trying to figure out how you'll make it through the next month with money in your checking account.
This article should have helped you decide if debt settlement is right for you. If you're still not sure, and I haven't helped you understand "The bad, the good, and the truth," click here to find out more about debt settlement.
