Debt settlement is a way to settle your debt by paying your creditors less than you owe them. Creditors are usually willing to negotiate and typically accept a settlement in the range of 40 to 50 percent of your outstanding balance.
Although this option may be a better solution for you than bankruptcy, it is still a huge mark against your credit score. Your lawyer will help decide whether debt settlement is best for you, and whether you’ll be better off paying a lump sum or making payments over time.
Before you make your decision, make sure you know the best way to go about debt settlements, what’s involved, and the do’s and don’ts.
Don’t wait too long, be proactive
Try not to let your payments get more than six months behind. At that point your creditor may deem your account as being “charged-off.” This term means your creditor believe his chances of being paid off are slim. That doesn’t mean your debt is going away, it just makes it much harder to get your creditor to agree to a debt settlement.
Know the consequences of debt settlement
Any settlement above $600 is taxable. Your creditor will also list your account as settled for less money than owed, letting future creditors know you were unable to pay off all of your debt. This really affects your credit score and your ability to borrow in the future.
Show your financial cards and accounts
Before agreeing to a settlement, your creditor will want to see proof of your financial status. They will want to see your income, assets and other existing debt in order to be convinced of your financial hardship.
Agree to a realistic settlement
Agree to a settlement that is financially manageable for you. Some lawyers will have you negotiate directly with the creditor to agree upon a payment that you can afford. If you can’t afford all of your scheduled payments after agreeing to, your account will be referred to a collection agency.
Make sure the debt is settled correctly on your credit report
After your settlement is paid, make sure the creditor reported it correctly to the credit bureaus. Many do not do so, and failure to do so will leave your credit report showing that your account is indefinitely delinquent.