If you find yourself burdened with overwhelming financial obligations, there are debt relief solutions available. One option to consider is debt settlement. Though it can be an alternative to bankruptcy, it’s not right for everyone. To determine if it might benefit your situation, here are the answers to some common questions on how the debt settlement process works.
What to Understand About Gaining Debt Relief Through Settlement
How does debt settlement work?
Debt settlement involves negotiating with creditors to reduce the balance of debts owed. Once both parties agree on an amount, it will be paid off with a lump sum or in installments according to a designated payment plan. After a settlement is complete, the creditor will report it as a charge-off to the credit bureaus, showing a zero balance.
What types of debt can be negotiated?
Similar to a bankruptcy discharge, debt settlements include unsecured debts like credit card bills, personal loans, and medical expenses. Secured debts, such as car and mortgage loans, aren’t eligible because they’re secured by property owned by the lender. Although there’s no property involved, student loans, child support, and alimony are also considered secured debt.
How will my credit be affected?
Generally, debt settlement results in an initial drop in credit score because you must stop paying your creditors while accounts are negotiated. However, in most cases, those who need debt relief have already seen their credit score decline due to missed or late payments and high debt-to-income ratio. If this is the case, you may not notice too much of a decrease in your rating. Once debts have been settled and paid off, you may begin rebuilding your credit right away.
Are there tax consequences?
Creditors are required to notify the IRS of any forgiven debts that exceed $600, so you’ll need to report the amount you saved as income on your tax return.
There is an exception if you can show you’re insolvent, which means you have a negative net worth. Under these circumstances, the IRS allows debtors to write off the canceled debt, and no tax will have to be paid on the reduced amounts.
If you’re interested in learning more about debt settlement and whether or not you’re a good candidate, reach out to Greg Dunn, Bankruptcy and Debt Relief Attorney. He’s provided personalized debt relief representation since 1996 and has successfully resolved thousands of cases for Honolulu, HI, residents. Call (808) 524-4529 to schedule a consultation, or visit him online for additional information on his services.