Understanding Debt Settlement...

Here's What You Need To Know

First, what is debt settlement? Debt settlement is a negotiation between you, the debtor, and your creditor over the amount you will pay to eliminate the balance due on your account. Debt settlement is certainly not taking the easy way out. It is reaching an accommodation with an entity that you owe money to instead of the alternative which is not paying them anything. It is legal, honorable, ethical and perfectly within your rights to do so. And through debt settlement, unlike bankruptcy, there is no public record. 

Individuals who pursue debt settlement have faced or are facing some kind of financial hardship, like being let go from a job or getting a demotion, going through a divorce, cut back in work hours, unexpected medical condition, and/or failed businesses. We do not advocate casually negotiating your debt. Debt settlement is powerful medicine and should be used only by those that truly need it. For the sake of those people that really need this kind of solution, if you are able to make the payments to your creditors without further hardship, do so. There are other ways of resolving debt in an expedited fashion that does not require such hard medicine. 

So, the big questions you need to ask yourself when considering debt settlement are: 

• Can I reasonably make the agreed to monthly payments to my creditors without jeopardizing my well being (keeping a roof over your head, food on your table, warm in the winter and cool in the summer) or making life unbearable?

• Will making monthly payments to my creditors help me achieve the primary goals of paying off my debt and achieving good credit in the foreseeable future (if your accounts are with collection agencies or attorneys, the answer is probably no)?

• Is the debt of concern mainly unsecured debt such as credit cards and unsecured loans (if the debt you are looking to deal with is mortgages and car loans, debt settlement will not be an answer)?

• Do you have a reasonable tolerance to pain (there was a time that receiving aggressive collection calls was a foregone by product of debt settlement, but now, calls can just about be abolished)?

• Are you able to set aside a reasonable amount of money each month toward the settlement of your debt (I usually use a rule of thumb of at least 2 percent of the debt)?

• Do you have any moral or religious beliefs that will cause you severe guilt over not paying your debts in full?

Debt settlement is a great approach under the right set of circumstances. It can magically cut your debt in half and sometimes even less.

And believe it or not, debt settlement is a "win-win" for both you and your creditors. After all, if you were to file bankruptcy, there is a good chance they would get nothing. Or worse, you can simply vanish and not deal with the debt at all.

Everyone would agree that something is better than nothing.

The real power, from a strategy standpoint, is the flexibility debt settlement offers you.

You control the money. You decide how much you can afford to set aside each month toward debt settlement and then you decide to whom you settle with and how much.

This is tremendous power.

But just like with everything else in life, there is no "free lunch".

Debt Settlement will have a negative impact on credit because by the nature of the strategy, you will not be making payments to the creditors.

Now, most people that take on debt settlement already have bad credit. Some have already fallen behind so their credit is considered poor by lending standards. While others have reached or exceeded their credit limit on their credit cards.

You may say, "yea, but my payments are on time".

Well, I have bad news, it doesn't matter.

Most lenders use what's called a FICO score in determining credit worthiness. One of the largest factors in determing FICO score is the amount of debt outstanding as a percentage of the available debt.

So if you are close to your credit limits, late payments or not, your credit has been severely compromised.

But let's say you are in the vast minority and your credit is still good. You have a decision to make. Credit or debt?

But before you answer that, you need to decide if you are able to make your payments, as contractually agreed, going forward. If the answer is "no", then it doesn't really matter, does it? Your payments will soon fall behind making this a non-issue.

Another consideration is the tax consequence. It is possible that you will owe taxes on the amount of money you save through debt settlement.

Yes, it's possible that you may need to pay taxes on forgiven debt balances, but the odds are against it. That's because the IRS allows insolvent taxpayers to exclude canceled debts. So unless you have a positive net worth (your assets are greater than your liabilities at the time of the settlement), you probably won't need to pay taxes on your settlements. And even if you did, so what? You'd be paying taxes because you saved a bunch of money off your debts! Would you not want to accept lottery winnings because of the tax money you would owe. It doesn't make any sense.

And finally, it needs to be pointed out that collection activity will intensify and you might even get sued.

It's true, if you fall behind on your bills, your creditors will most certainly continue attempts to collect what's owed, and though it happens less than you would imagine, one or more of those creditors might sue you in civil court.

But consider this,collection activity is already a function of being in debt trouble. At least debt settlement allows youto use the collection process to eliminate debt through negotiations. And even lawsuits can be settled.

So here it is in a nut shell. 

Debt settlement can be the answer to your financial challenges, but it is not for everyone. Consider your options wisely. The decision is all yours.