Debt settlement involves settling your debt for less than what you owe. There are many debt settlement companies and organizations that promise to settle your debt for pennies on the dollar. While it is possible to find a reliable debt settlement company, and possible to settle debt for less than what you owe, you generally can negotiate with your creditors without the help of a debt settlement company. And in either situation, you will still end up paying at least a portion of your debt back.
Select the Opportune Time to Settle
Most creditors will not settle your debts until you have fallen behind on your payments. There is simply no reason for a creditor to accept an offer of less than what you owe while you are still current, even if you are struggling. While you might be able to speak with a creditor and arrange a payment plan that lowers your monthly payments and extends the amount of time you have to pay your debt, this is not settling debt for less and will end up costing you more in interest in the long run. Creditors will only settle debt for less if they fear that the debt is going to go to collections, because when a debt goes to collections the creditor is only paid a very small fraction of what the debt is worth. Most debts are written off or sent to collections after 6 months. So the opportune time to settle is when you are more than 30 days late on a payment, but before six months has passed. During this five-month window of time, you should be saving the money you would normally send for debt payments toward a lump sum settlement. Be aware that creditors will become increasingly persistent about collecting money during this time, so you should expect ample calls from collectors.
Get Everything In Writing
Although it is tempting to try to negotiate with creditors on the phone, especially when they are calling you often, this is not advisable. You want to have everything, especially any settlement offers, in writing. Communicate with your creditors by registered letter, and ensure that any letters that are sent to you are on official company letterhead and/or signed by someone with decision-making authority in the credit card company. When negotiating, you should generally make an offer to pay approximately 30 to 50 percent of what you owe. Creditors may counter that offer, and you can negotiate back and forth with creditors until you arrive at an amount that is workable for you. Before you send any money, make sure you have a document detailing the full terms of the settlement, including how much you are to pay, when you are going to pay it and for which debts it will constitute payment in full.
Understand the Law(s)
During the time period when collectors are calling you, you need to understand the Fair Debt Collection Laws. Creditors cannot threaten you, call you before 8 am or after 9 pm, make false claims that they will arrest you or that they are an attorney or send you documents that look like legal papers if they aren't really legal papers. During the period of time when you are negotiating with your creditors, you should remind debt collectors of these rules and if they violate them, keep detailed records as you can sue debt collectors for violating any of these rules.
You also need to understand that settling debt will have an adverse impact on your credit score. Your payment history, which makes up 35 percent of your credit score, will be affected during the months of non-payment. In addition, the debt will usually show as "settled" on your credit report instead of "paid in full," and this also has an adverse impact on your credit rating.
Finally, you may be taxed on the forgiven portion of your debt as income. This means that a 1099C will come in the mail, you will have to file these taxes with the IRS, and you will have to pay taxes on the forgiven amount of the debt.
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