Understanding How Debt Settlement Works

While many Americans struggle to make their credit card payments, more and more are beginning to turn to debt settlement when they find they can no longer afford the debt they have.

Simply stated, debt settlement is when a company or service negotiates with creditors in order to reduce the amount of debt that is owed. In the vast majority of cases it is credit card debt that is being negotiated.

Debt settlement should only be considered as a last resort before filing personal bankruptcy. It has very serious financial ramifications attached to it and should not be taken lightly.

Upon enlisting the services of a debt settlement company they will negotiate with your creditors to reduce what you owe as much as they possibly can in return for charging you a fee based upon how the total amount owed.

Many of the debt settlement services and lawyers that work in this field will make the claim that they can save their clients up to 50% of what they owe.

The debt settlement company will close all of your credit card accounts and set up a payment schedule with you whereby your debts will be paid in full up front or overtime.

The individual that enlists the services should expect their credit score to drop dramatically. It is not unusual for credit scores to drop by 50 points to 150 points.

They’ll also see negative marks on their credit records that will show that they have made partial payments on settled debt. Those negative marks will remain for years.

It must also be noted that there are tax obligations on the amount of debt that was forgiven. A 1099-C will be issued at the end of the year and federal income taxes will be levied based upon the amount.

Once again, debt settlement is not something that should be entered into lightly by any means. Carefully weigh your options before deciding which one best serves your financial needs.

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