About Debt Settlements
Debt settlement is a procedure in which you can eliminate a potentially large amount of debt by negotiating with your creditors. Engaging in debt settlement could save you some money on having to pay off your debt, but it can come with some large consequences as well.
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Debt Settlement Basics
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Debt settlement is a process that you engage in with your individual creditors. You negotiate with your creditor to take a lesser amount of money than what you actually owe on your account. The creditor typically requires a lump sum payment before it will accept a settlement. In some cases, you may settle your debts for less than half of what you actually owe the creditor. The account are closed out and you no longer owe the extra money.
Hurting Your Credit Score
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Even though this approach could save you some money, it also has the potential to devastate your credit. According to MSN, when you settle an account in this manner, it can lower your credit score by as much as 125 points. If you settle accounts with several different creditors, this could hurt your score by 125 points for each account that you settle. Your score can be damaged significantly if you do this with several accounts.
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Hiring Help
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When you choose to engage in debt settlement, you may need to hire some help for this process. You can negotiate your own settlements or you can work with a debt settlement company. Debt settlement companies help you negotiate your settlements instead of requiring you to do the work yourself. When hiring one of these companies, you need to check them out thoroughly to make sure that you are dealing with a reputable company. These companies also charge large fees, so you must be willing to pay their fees to get help.
Tax Consequences
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When you settle a debt, you might think that you are getting off without paying a large portion of the money to your creditor. While this may be the case, it also might end up costing you some more money in the future. After you settle your debt, the creditor will report the amount that it wrote off to the Internal Revenue Service. This amount counts as income for you and you have to pay taxes on it.
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