Debt Settlement

Much negative information has been written about debt settlement in years past that has skewed the reality of debt settlement as a real debt relief solution.

Today, we have a perception issue created by debt settlement companies who have delivered inferior products and poor customer services and the functional reality of settling debt.

How Debt Settlement Works

Debt settlement could be called debt negotiation, debt meeting of the minds, or debt arrangement. No matter what you call it, debt settlement is simply an agreement to resolve a financial obligation owed for less than the current balance.

Both parties must reach a mutual consensus that the money the consumer, you, can scrape together is enough and better than not receiving payment. In return, the creditor will be willing to accept less than is owed, probably take a loss on the account, and allow the matter to be resolved in full.

Debt settlement meeting of creditors.
Debt Settlement Agreement Meeting – 1936

Debt Settlement Critical Moments

When engaging in settling a debt, the least educated person about the process is you, the consumer/debtor. Chances are you’ve never settled debt, and you are very emotionally involved in the process. Without experience, you have no idea if you are getting a good deal or not. But often, if you are more than 90 days past due on your debt, a great offer will arrive in your mailbox from the creditor. Getting professional help to settle a debt can be very beneficial.

Some people struggle over the issue if debt settlement is ethical. It certainly is since a debt can’t be settled without both parties agreeing to it.

Speaking of agreeing, before you agree to settle a debt, get the offer in writing. If you are dealing with your original creditor, the advance written agreement is less critical since they will most likely honor the agreement and send you confirmation of the settlement once your full payment for the settled amount is received. For example, see Bank of America Credit Card Debt Settlement Advice and Instructions.

If you are dealing with a third-party collector, then an advance written offer to settle is essential. I’ve seen debtors make settlement payments to collectors only to have them say they never agreed to a settlement. Without some proof to back up that claim, it’s hard to prove there ever was a settlement offer on the table.

Whatever you do, file the settlement agreement and proof you made the payment with all your other important papers and never lose it. Many people have faced claims years later that there never was a settlement on the debt and a balance is still due. If the creditor will “misplace” their records on the settlement, you absolutely can’t.

You Can Settle All Types of Debts

Every single type of debt can be settled. From unsecured credit cards, private student loans, mortgages, etc. The key to success is to not focus on if a debt can be settled, but how.

Debt Settlement Occurs When You Are In Default

Creditors are most likely to settle a debt when you are more than 90 days past due. This is simply because past due triggers an internal process that opens options not available to you when you are current on the debt payments. But being in default has consequences. If you are behind on your debt, you will receive collection calls and mail. You’ll also get charged a penalty rate on your account and fees for being past due. You could even face the risk of being sued over the delinquent debt. Let’s not forget, the delinquency will most likely appear on your credit report.

After Your Debt is Settled

After your debt is settled, you may receive an IRS form 1099-C. If you are not insolvent, you may have to pay income tax on the amount of debt forgiven. If you are insolvent you can file IRS Form 982 to have your tax liability waived.

The part of the debt that was waived will appear as a bad debt on your credit report. It may appear on your credit report for up to seven years. However, the negative reporting should be seven years since you first went delinquent this last time.

You’ll also need to focus on rebuilding your credit following debt settlement, that’s easy to do.

The Bad Side of Debt Settlement

Where debt settlement ran off the rails in recent years was primarily caused by companies with commissioned salespeople forcing a debt settlement product on consumers as if it was a magic solution that is the cure for all money troubles. It’s just not.

Some debt settlement companies delivered horrible customer service and left many unhappy consumers in their wake.

Ultimately, when selecting a debt settlement company to work with, you can follow their guides.

Final Debt Settlement Truths

Debt settlement is a valid tool to us selectively deal with certain debts. It’s not always a single solution that applies to all debts you might owe. Anyone who tells you so should be suspect.

Ultimately settling your debts can be substantially more expensive than filing bankruptcy. Settling the debts will also take a lot more time to eliminate all your debts, if at all. The overwhelming majority of people sold debt settlement never settle all their debts.

To compare debt settlement with other debt relief options, use my Get Out of Debt Calculator.