What Is Debt Settlement?

Debt settlement refers to an agreement made between a creditor and you, to reduce overall debts in exchange for a lump sum payment. Understand how it works.
A woman looks at her bills sitting on the table as she consults her computer with a stressed look on her face dealing with her debt

You can erase your debt through debt settlement, but is that the right option for you?

While it’s possible for you to use professional debt settlement company methods to improve your financial situation, you should know all your options before you decide how to deal with your debt.

For example, if you contact your credit card company to settle your debt with them, what would be your options? A payment plan most likely wouldn’t be one of them, because if you were able to adhere to a payment plan, you never would have gotten behind on your payments in the first place.

It’s likely that the credit card company would demand a lump sum payment in order to settle the account for less than you owe.

But what if you don’t have a lump sum? Does that mean you can’t use debt settlement to get out of debt? Not necessarily.

Pros and Cons of Debt Settlement

How Does Debt Settlement Work?

Debt settlement companies are able to work with your creditors to get them to accept less than the balance of what you owe. You can also do this yourself, but it’s harder if you don’t have a large amount of money to settle with. Debt settlement companies may be able to work out a payment plan for you.

For most people, debt settlement is the step before filing for bankruptcy protection. Debt settlement means your creditors are able to recover some of the money they’ve loaned to you, so working with a settlement company is in their favor.

If you still feel that attempting to settle debts on your own is better for you, here is some debt settlement advice you should keep in mind when negotiating on your behalf.

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Debt Settlement Can Damage Your Credit

Debt settlements will be reflected on your credit report and thus your FICO score could decrease as a result unless you obtain a “paid in full” letter from your creditor.

Rather than showing as “paid in full,” your settled debt will show on your credit reports as settled for less than you owe.  As you settle your accounts your credit score will reflect these changes.

Credit repair may be offered by a debt settlement company as the process can help remove negative remarks on your credit report.

You May Be Sued for the Money You Owe

Whenever debts go unpaid, there is always the possibility of a lawsuit brought on by creditors.

When you enter into the debt settlement process, your accounts remain in default. By remaining in default, this means the creditor or its assignee can still file a lawsuit against you.

Having a debt settlement company can help you be in a better position to successfully negotiate a settlement.

If you negotiate the debt yourself, you need to make sure to get it in writing that the creditor has agreed to accept a certain amount as payment in full for the debt.


Certain Debts May Not be Eligible for Settlement

The types of debts you have may have an impact on the success of a negotiation.

Tax liens and domestic judgments remain unaffected and some individual creditors may have a very strong resistance when it comes to settling your debt (they might not want to at all).

This is another area where using a professional, knowledgeable debt settlement company can be helpful.

There Are Tax Consequences to Debt Settlement

Another concern about debt settlement is that if you have partially canceled debts outside of the bankruptcy system, you will need to report them as taxable income.

The Internal Revenue Service (IRS) considers any amount of forgiven debt as taxable income. There is an exception: the IRS doesn’t require you to report the forgiven debt if you were insolvent at the time the creditor forgave the debt. This means that you don’t have to report the forgiven debt if the amount of your debts were or are greater than your assets (how much money and property you own).

The Bottom Line

We can help you find a debt settlement company or a debt consolidation loan that meets your specific needs. AmONE is a leading financial solutions provider and our mission is to help you access the highest level of industry-leading debt solutions and to give you the support and advice you need to achieve your financial goals.