Debt Settlement

Debt settlement can be a useful option when a consumer has acquired too much debt that he or she cannot pay off in full. With debt settlement, the creditor agrees to settle with the debtor for an amount that’s less than the actual amount owed.

Much like most debt management options, debt settlement has its advantages and disadvantages. Debt settlement can reduce the total amount that is owed to creditors and it can also reduce interest on your debt. Debt settlement can eliminate any future fees on your debt, it can consolidate all of your payments under one creditor, and it is possible to become debt-free in less than two years. And, unlike a debt consolidation loan, you are not creating new debt by borrowing to get out of debt.

One of the disadvantages of debt settlement is the negative effect it may have on your credit report. Because you won’t be paying your creditors their usual monthly payments, this will be noted on your credit report. However, to some creditors this notation can also mean that the debtor did take responsibility in paying as much as he or she possibly could, which may help to offset the negatives. Additionally, because your credit report will show that the debt is “paid” or “settled” rather than “outstanding,” this may have a positive effect on your credit history.  

Another disadvantage to debt settlement is that any cancelled amount exceeding $600 is considered taxable income. If the creditor reports the forgiven amount to the IRS, you will receive a 1099-C. In some instances, however, the IRS will decide that the debtor is insolvent, meaning that the debtor will not owe any Federal taxes on the amount.

If you decide that debt settlement is the best option for you, there are several ways to accomplish it. You may negotiate your own debt settlement agreement or you can hire a consumer law attorney to assist you. It is highly recommend that you hire an attorney, especially if your debt is substantial. When negotiating a debt settlement agreement on your own it is important to get everything in writing. Debt collectors can be quite dishonest, so it’s best to have a signed agreement in hand before you make any kind of payment. The agreement should clearly state the following:

• Payment due date
• How much you have agreed to pay (the total amount and each payment amount)
• Method of payment (i.e. cashier’s check, electronic bank transfer)
• The debt collector will report to the three major credit bureaus that the debt has been settled or (if applicable) “paid in full”  
• Any and all conditions of the agreement (consequences of late payments, consequences of breach)
• Any concessions that the debt collector has made

It is recommended that you contact a consumer law attorney to review the agreement to ensure that your interests are well protected. You can search for consumer law attorneys in your local area through the American Bar Association (ABA) website. Access to the ABA lawyer locator is free.

If you cannot afford a lawyer, but instead, you are considering a debt settlement agency -- beware. A large number of debt settlement firms do not conduct business in a proper manner, many are not accredited, and many do not employ certified arbitrators. Before you do business with a debt settlement agency check to make sure that their staff consists of IAPDA (International Association of Professional Debt Arbitrators) certified debt arbitrators, that they belong to an accredited U.S. Chamber of Commerce, and that they are a member of the Better Business Bureau.