Debt Settlement allows you to negotiate with creditors to pay off debt on delinquent, unsecured credit accounts and personal loans over a specified time (or all at once) for an amount less than what you owe. For example, a person with a Chase credit card with a $10,000 balance might only be able to pay $4,000 to close and “settle” the account and have the remaining $6,000 forgiven.
Debt Balance Reduction
Debt Settlement may or may not be the right option for you. You need to consider the risks, including that you are still liable to be sued and if you miss a payment you may be back at square one. It is wise to consider how it impacts your credit and that you may owe taxes on the amount of debt forgiven on your accounts.
We recommend consulting a tax attorney or tax adviser for specific information. Here are some things to consider regarding the potential impact on taxes:
When it comes to your credit report, there are pros and cons to debt settlement. Creditors will actually not settle with you unless you are late with payments. These late payments have a negative impact on your credit score. In fact, on-time payment history is roughly 30% of how your credit score is factored. It’s likely, however, that you’re considering debt settlement because you’re already late on at least some of your accounts. As this is already impacting your credit score, settling your accounts can help your credit heal and your score recover.
If debt settlement is not the right choice for you, some alternatives you may consider are debt management, bankruptcy and debt consolidation.
The debt settlement agreement is the settlement contract between you and your creditor that includes all of the critical details you have both agreed upon, i.e., settlement amount, payment plan and date(s), involved parties, etc. If you negotiate your settlement plans yourself, you can use a debt settlement agreement template to create this binding document. You will need a separate agreement for each creditor.
There are a lot of traditional debt settlement companies and not all have your best interest in mind. We’re not fans of the high fees charged for most of their programs. We’ve also found that many negotiate your accounts in an order that gets them paid faster rather than saving you the most money.
The FTC provides guidance for selecting a debt settlement company. You can start by checking out the company with your state Attorney General and local consumer protection agency. The FTC cautions against using any company that:
Debt Settlement Agreement — Build the contract for your settlement documenting the criteria you negotiate with your creditor.
Credit Dispute Letter – Draft a letter to dispute information on your credit report.
Debt Settlement Calculator – Determine how much you might save with a debt settlement.
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