The state of the economy has a lot of consumers overwhelmed with debt. Anyone struggling to make ends meet may want to consider settling their debts. To settle your debt there are a number of procedures you will need to follow. It's important to note that there are some consequences as a result of following through with this process. If you can make your monthly payments comfortably, then debt settlement may not be for you.
Settlement Procedures
Once you decide to settle your accounts, make a list of all of your debts including the name of the creditor, balance, monthly payment and interest rate. Determine the amount of the settlement you are seeking and do the same for the payments and interest rate. Make sure you can afford to make the new payments and never let a creditor force you to make a payment that does not fit in with your budget.
Contact Creditors
If you are thinking about settling your debt, contact your creditors and negotiate a settlement on your own. A lot of creditors are willing to work with you in this regard because of the alternative. If no settlement is reached, bankruptcy could become a reality, which stops unsecured creditors from receiving anything. Explain your situation to the creditor. You may be able to settle your debt for as little as 40 to 50 percent of your outstanding balance. Make sure you receive your settlement offer in the mail before you send the creditor any money.
Debt Relief Programs
There are a lot of debt relief programs available that will help you settle your debt. A program such as this has the ability to negotiate debt settlement with your creditors in the amount of 50 percent of your monthly payments. They will contact all of your creditors and negotiate settlements. You will most likely receive lower rates of interest with your creditors.
Credit Report
Once you settle your deb,t it will have a negative impact on your credit report by lowering your credit score. When your score is lowered, you may have to pay a higher interest rate for other credit products, such as mortgages, auto loans and credit cards. Some creditors may charge a substantial amount of fees and it may become difficult to get approved. Derogatory information such as debt settlement can remain on your credit file for seven years.
Taxes
Depending on your situation you may have to pay taxes on the settled debt. If you owe $8,000 to a creditor, and you settle for $5,000, you may have to report $3,000 as taxable income when you file your taxes. Once your debt is settled the creditor may send you a 1099-C, which is a cancellation of debt form. There are two situations which will keep you from reporting your settled debt as taxable income: if you file a petition for bankruptcy and if it is determined that you are insolvent. Insolvency is when your liabilities exceed your assets. If you receive a 1099-C form contact your tax advisor or a tax attorney immediately to see how you should proceed. If you meet either one of the aforementioned situations your tax professional may suggest you file an IRS form 982 in conjunction with the 1099-C
Fees
There are fees you will incur when you enroll with a debt relief program. Fees can be calculated a number of ways.They can calculate it based on the number of creditors and balances, case by case, the amount of debt settled, or as a percentage of your total debt such as 15 percent.
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