How to Understand Debt Settlement

Debt settlement allows you to reduce the balance of a debt by as much as 60 percent. On the face of it, debt settlement sounds like a fairly easy way to resolve delinquencies and clear balances. Before you jump into the deep end of the debt settlement pool, there are several things to consider.

Difficulty: Moderately Easy

Instructions

1. Contact each creditor and explain why you want to settle your debt for a reduced amount. Reasons include catastrophic events or illness, business failure or simply being overextended. Keep a log of your contacts, including the name, agent identification number of the person you spoke with, the time and date, and details of the conversation. If possible, get a callback number.

2. Understand the exact terms of your agreement. Different creditors have varying methods of determining settlement thresholds, eligibility and payment arrangements. The "settlement in full" or "SIF" amount may be due immediately or in three or four installments. Many creditors require that you set up the payment(s) as an automatic draft from a checking account.

3. Many creditors will not discuss a settlement unless you have the funds available at the time. The settlement amount can change from day to day, depending on the terms and conditions of your account.

4. Be aware that the settlement is reported to the three credit bureaus and is the most negative trade line you can have, other than a bankruptcy. There are worse things in life, of course; but a settlement is considered the last resort before going to Bankruptcy Court.

5. Federal tax law considers the amount that is written off as income. If the amount of the debt reduction exceeds $599, the creditor will issue a Form 1099 that you must file as part of your federal income taxes for that year.

6. The "write off" portion of the balance will not be removed until 30 days after the payment arrangement is complete. You will receive paperwork with the details of the arrangement as well as a final statement showing a zero balance.

Tips & Warnings

• The portion of the debt that is "written off" is likely to consist of over-the-credit-limit fees, late fees and the resulting inflated interest.
• Many creditors will not discuss a settlement unless you have the funds available at the time. The settlement amount can change from day to day, depending on the terms and conditions of your account.
• If at all possible, get it in writing as soon as the arrangement is made.
• Refuse to pay a set-up fee for automatic drafts. Many creditors try to charge a "service fee" of $10-$18 per auto-draft. By setting up auto-drafts, you are saving the creditor processing time at the payment center and virtually guaranteeing the arrangement. The agent will state the fee as a fact but has the latitude to waive it, so be sure to speak up.
• You cannot settle debt because you "don't feel like paying." Some creditors may ask that you provide proof of the circumstances that necessitate a settlement.
• Make settlement arrangements on your own. You don't need to pay a "settlement" or "debt management" company to do it for you.
• Do not discuss a settlement and then just start sending payments without a firm arrangement with the creditor. Make certain that your account has been flagged for settlement, that the write-off amount is determined and the payment arrangement is clear to both parties.

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[IcyCucky]

on 11/11/2008 This is great info, and I will pass to people I know that are in this situation!