Negotiating Debt Settlement

If you are in a position of severe economic distress to the point where you are considering filing bankruptcy, there is another option you should know about before you go that route. That option is negotiating debt settlement offers, a process where you or a credit counselor representing you approaches each of your creditors with a proposal to pay off your account for a lesser amount than is actually owed on it. If you are severely delinquent on your accounts, creditors will be more likely to accept this arrangement than if you have not yet missed any payments. In fact, most creditors will not negotiate unless a cardholder is at least 90 days past due.

How it Works

In a typical debt settlement, you agree to pay a lesser amount as soon as possible and in return the creditor will mark the account as paid in full and report this to the credit bureaus. An example of this would be a creditor who agreed to accept $6,000 on a $10,000 balance. The difference of $4,000 would be written off by the creditor in a process known as debt forgiveness.

Benefits for the Creditor

Although negotiating a debt settlement may appear to benefit only you, there are also advantages for the creditor, including ceasing to pay for collection efforts. Also, if you are forced to file bankruptcy, the creditor receives nothing, so it is in their own best interest to accommodate requests for debt settlements.

How to Reach a Debt Settlement

The creditor may propose a debt settlement plan to you if they are to the point of writing off the account as a bad debt, although this is not a certainty. If you are interested in debt settlement, you should find a third party organization that specializes in it. Debt negotiators that work for such organizations are skilled in working out deals with creditors, and may be able to attain a better deal than you could on your own.

What the Creditor Looks For

The creditor will be more likely to accept a debt settlement if your financial hardship is due to a circumstance you had no control over, such as the death of your spouse or the loss of a job.

Tax Implications

The Internal Revenue Service (IRS) requires that you report all forgiven debt exceeding $600 on your tax return next year. There may be exceptions to this, so consult with a certified public accountant (CPA) for a more detailed explanation before you file your next tax return. For more information about debt settlement, submit a form today!