Debt settlement can reduce the amount of debt you owe and help clear debts you have stopped paying. Many lenders are willing to negotiate a settlement, because they want to receive some money for the debt rather than none at all. However, most companies will not negotiate debt settlement with you until you are several months behind on your payments.
Settling Your Debts
When you settle a debt, you agree to pay a portion of what you owe to the company, and the creditor forgives the remainder of the debt. This is an option only if you are currently behind on payments. The Money-zine website reports, "Many credit card debt accounts will settle in a range of 30 to 70 percent of money owed." You should save a sufficient amount to make a lump sum payment before calling a credit card company to ask them to settle the debt. When you reach a credit card representative, offer a percentage of the amount you owe to count as settlement in full. You can negotiate based on that first offer. If the creditor accepts the settlement, you should request a written statement that the amount will count as settlement for payment in full. After you have received the letter, you can submit the payment. Keep a copy of the letter and payment on file. If the creditor will not settle for an amount that seems reasonable, you may save the money you have accumulated and call again later.
Choosing a Debt Settlement Company
Another option when choosing debt settlement is to have a debt settlement company settle your debts for you. The company will contact your creditors and negotiate the settlement amount for each debt on your behalf. Generally, these companies charge a high fee for this service. Additionally, you may be required to make monthly payments to them so they can collect the money needed to settle the debts. Some of these companies do not follow through on their promises, and some close down suddenly and take your money. It is important to research the company with the Better Business Bureau and choose a company that has been in business for several years.
Debt Settlement Warnings
The forgiven amount of any debt settled will be counted as taxable income at the end of the year. You should track the amount you have settled and set aside extra money to cover the tax bill at the end of the year. If you are current on your payments, you should consider a different option to get rid of your debt. If you are behind on your payments, this may be a suitable option to begin to clear up your financial problems, but debt settlement will damage your credit score for several years and make it difficult to obtain credit.
After Debt Settlement
Once you have settled all your debts, you need to stay current on any other debt payments to improve your credit score. Most companies will be unwilling to lend you money for several years, because a debt settlement entry on your credit report makes you a high credit risk. Budget carefully and pay cash for your purchases if possible, because you probably will not qualify for a favorable interest rate. After about three years, you may be able to qualify for better rates and begin building your credit score again.
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