Creditor Settlement Agreement

If you're struggling with debt, there are a number of options for dealing with it, including debt consolidation, bankruptcy and debt settlement. A debt settlement agreement, which you negotiate with your creditors, allows you to pay less than what you owe and avoid the potentially complicated process of filing bankruptcy.

Eligiblity

While each creditor has its own requirements regarding settlement agreements, you must meet some basic criteria to begin the process. In general, your account must be past due for a creditor to consider a settlement. The longer your account goes unpaid, the more likely a creditor is to settle. While there is no specific amount of debt needed to negotiate a settlement, most debt settlement companies offer services for consumers who owe $10,000 or more.

Process

Negotiating a creditor settlement agreement can be done two ways: by using a debt settlement company or on your own. Either way, the process is fairly similar. You or the debt settlement company contacts the creditor with a settlement offer. The creditor may accept the offer or make a counteroffer. If you agree on the settlement amount, you can then negotiate how payments will be made and how the account will be reported on your credit. Once both parties have signed off on the agreement, you pay the creditor, either in a lump sum or multiple payments.

Benefits

The obvious benefit to entering a creditor settlement agreement is that it can allow you to pay less than what you owe while saving money in interest and fees. If your creditors are threatening a civil lawsuit, reaching a settlement agreement can help you to avoid having a judgment entered against you. If you're considering bankruptcy, a creditor settlement agreement can be less damaging to your credit.

Considerations

A debt settlement can have significant consequences at tax time. If the amount of debt forgiven exceeds $599, you may have to pay income tax on the remaining unpaid debt. Consult an attorney prior to signing any agreement that requires you to consent to a judgment. If you fail to pay the settlement as agreed, your creditors can resume collection actions against you, including a civil lawsuit, for the full amount of the debt.

Warning

If you're considering contracting the services of a debt settlement firm, research the company beforehand. While there are a number of legitimate companies offering debt settlement services, there are also many organizations operating scams. The Federal Trade Commission is taking steps to eliminate these fraudulent business, but as of 2010, debt settlement companies remain largely unregulated. The FTC advises consumers to thoroughly scrutinize the company's terms prior to signing any type of contract.