Develop Your Own Debt Settlement Strategy

Developing a good debt settlement strategy is an essential component of managing debt, as a successfully executed plan can eliminate anywhere between 25 to 65 percent of a consumer’s total debt obligation. Here, we have included several guidelines you should consider prior to developing your own debt settlement strategy.

Getting Started 

First, it is important when developing your debt settlement strategy to target only those debts classified as unsecured. Some examples of unsecured debts are most credit card balances and medical expenses. Examples of debt ineligible for debt settlement are student loans, mortgages and auto financing. Additionally, prior to developing a formal debt settlement strategy, it is important to determine if you prefer to work with a debt settlement professional or negotiate with creditors directly. Each method has its advantages and disadvantages. For example, a good debt settlement company is experienced in the laws and regulations that affect debt settlement practices. However, you may find one disadvantage to hiring a professional is that you will be working with someone not personally vested in the negotiation process. If you decide to negotiate terms personally, the best place to start is by calling the creditor's customer service or accounts receivable department. From there, you can quickly learn the company's debt settlement practices and if the company is prepared to negotiate terms or if they plan to pursue the full amount owed. 

Benefits of Debt Settlement Companies vs. Debt Negotiation Companies

If you decide to use a debt settlement professional, there are several companies you can hire that specialize in negotiating debt settlement terms. For instance, some debt settlement companies work with consumers immediately prepared to offer a lump sum to settle their accounts. In these circumstances, if the consumer does not have a lump sum immediately available, the settlement firm will work with the individual to save the exact amount needed. For their services, the debt settlement company is paid a percentage of the balance.

Other debt negotiation companies, however, work exclusively with clients who do not have a lump sum available. Instead, these firms administer trusts on behalf of their clients with the sole purpose of accumulating enough money to settle their client’s debt at a future date, typically in 3 to 5 years. These firms collect a monthly payment that includes their service fees. It is important to note debt negotiation programs have a high dropout rate. Late fees continue to accumulate when consumers drop out. Typically, consumers are unable to make monthly payments on time, and they eventually fall into default. It is important when considering debt negotiation professionals to carefully research prospective vendors to confirm their business practices. Of course, it may be to your benefit to utilize either the debt negotiation or debt settlement concepts when negotiating a settlement on your own.

Objections to Negotiating Settlements

Whether using a professional debt settlement representative or negotiating terms yourself, individuals should be aware of the obstacles they may face when negotiating a settlement. One concern is that until a settlement amount is negotiated and fully satisfied, the creditor can still sue consumers for any amounts owed. Additionally, it is important to note debt settlements may have a negative effect on an individual’s credit score until the account balance is fully satisfied. However, to address this, some debt settlement companies may offer credit repair services as a part of their overall service package. Another concern to be aware of is the adverse tax affects debt negotiations can have when calculating taxable income during tax season. In most instances, the Internal Revenue Service will require taxpayers to report any forgiven debt over $600 as taxable income. To learn more about this possible income tax requirement, please refer to IRS publication 982.

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