Debt settlement and bankruptcy are both viable options to eliminate debt. However, experts suggest debt settlement is less detrimental to your credit than personal bankruptcy. In most cases, debt settlement remains on your credit history for seven years, while bankruptcy can haunt you for an entire decade.
Engaging in debt settlement generally requires the assistance of a professional debt settlement company. These organizations are usually well-connected within the credit industry and have the ability to negotiate with lenders and credit card companies.
Debt settlement can significantly reduce outstanding credit card and unsecured loan balances. It is not uncommon for professional organizations to slash debts by up to 60-percent. However, debtors do not receive the full reduction.
Debt settlement companies charge a fee for their services. This usually consists of a start-up fee and monthly payments which last until negotiated debts are paid in full. Fees typically range from 10- to 40-percent of the overall debt.
For example, if a borrower owes $100,000, the debt settlement company bases their fee on that amount. Now, let’s say the organization is able to negotiate the amount of payable debt down to $40,000 and charge 20-percent in fees.
The debtor would be required to pay the debt settlement company $20,000 to reduce their debt by $60,000. Overall, they would obtain a savings of $40,000.
Once debt settlement occurs, the borrower must pay creditors a lump sum of cash or adhere to a repayment plan. Once the negotiated amount is paid in full; creditor’s write-off the remaining balance.
In most cases, debt settlement cannot be used to reduce balances on mortgage notes, secured notes, tax liens, or delinquent child support.
Debt settlement can be used to negotiate credit cards, unsecured personal loans, student loans, medical bills, repossessions, and collection accounts.
It is important to understand the Internal Revenue Service may assess taxes on the negotiated debt amount. Using the example above, the IRS could potentially assess capital gains tax on the $60,000 of reduced debt. Therefore, it is imperative to consult with a tax professional before entering into a debt settlement contract.
Debt settlement does adversely affect your credit rating, but it not as detrimental as personal bankruptcy. In actuality, the impact debt settlement has on your credit rating depends on your current credit status. If you possess a relatively high credit rating, debt settlement will have a more negative impact than if you have lousy credit.
When seeking out debt settlement companies, it is crucial to conduct research and ensure the organization is in good standing. Check with the Better Business Bureau and conduct research online to determine if the debt settlement company is in good standing or if numerous complaints have been filed. Unfortunately, there are many scam artists posing as debt settlement agents. You do not want to place your personal information in the hands of a con artist!
Once a professional debt settlement company is located, debtors must undergo the process of providing details about each account they want to negotiate. It is important to realize creditors are not obligated to negotiate debts. Hiring a reputable agency with a proven track record can improve your chances of successful negotiation.
Typically, debt settlement repayment plans last one to three years, depending on the amount of debt owed. Most plans require the debtor to contribute a considerable amount of disposable income toward repayment of debts. If debtors default on their plan, creditors can demand payment in full or dismiss negotiations and reinstate the full amount of the loan.
Before making a final decision, take time to review all debt elimination options. These could include debt consolidation, credit counseling and budgeting.