Debt settlement is a financial strategy where an individual negotiates with creditors and/or debt collectors to settle their debts for less than the full amount owed. This typically involves making a lump-sum payment or several installment payments to resolve the debt, with the creditor agreeing to forgive the remaining balance. Debt settlement can be pursued independently or through a professional debt settlement company.
How Debt Settlement Works:
- Assessment: Evaluate your debts and determine if settlement is a viable option.
- Negotiation: Contact creditors to propose a settlement offer. Creditors may agree if they believe it’s the best way to recover part of the debt.
- Agreement: If a settlement is reached, ensure the terms are documented in writing.
- Payment: Make the agreed-upon installment payments or lump-sum payment to settle the debt within the agreed upon timeframe.
Key Considerations:
- Credit Impact: Debt settlement may significantly lower your credit score, as creditors may report the account as "settled" or "paid less than full balance", rather than "paid in full."
- Tax Implications: Forgiven debt may be considered taxable income by the IRS. Balances forgiven of more than $600 will generate a 1099c.
Who Should Consider Debt Settlement?
- Individuals with a significant amount of unsecured debt (like credit cards or medical bills).
- Those facing financial hardship and unable to make regular payments.
- People who have tried other options, like budgeting, credit counseling, or consolidation, without success.
While debt settlement can provide relief, it’s important to understand all the implications and explore other alternatives, such as debt management plans, working with your creditors on a payment plan that does not require settlement, or bankruptcy, depending on your financial situation.
This information is for general educations purposes only and not specific to your situation.
Best Egg does cannot provide advice or make any specific representations or recommendations. Consulting a financial professional to discuss your options is suggested.