Also known as Debt Negotiation,
Debt Settlement is an aggressive approach to debt reduction, which
is appropriate for debtors with a serious amount of debt or who are considering
bankruptcy.
A debt settlement company negotiates
with the creditors to settle the debt for a lower amount than owed, as the debtor
saves their money for a lump-sum settlement payment. After the debt is settled,
the creditor will send a letter stating the debt obligation was fulfilled, and will
report to the credit bureaus that the debt has been, “Settled for less than full
amount”, “Paid” or “Settled”.
Creditors will usually settle for less than owed when the debtor is under serious
financial strain because if the debtor chooses to file bankruptcy, then the creditor
gets nothing. Creditors want to get as much money back as they can.
Debt Settlement is a way to get out of debt in the shortest amount of time, and
with the least amount of money without filing for bankruptcy. There are some drawbacks
though. The IRS considers a forgiven debt as taxable income, so at the end of the
year, they will expect taxes to be paid on the settlement. The IRS, however, has
a form (#982) available for special hardships.
Debt Settlement can also be harmful to a debtor’s credit-rating while they
are in the process of settling their debts because creditors won’t agree to settle
on an account that remains current. The debtor’s credit report will reflect that
they are behind in payments until the debts are settled.
