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Debt Consolidation Versus Debt Settlement

Is Debt Settlement Legal?

Debt settlement, also known as debt arbitration and debt negotiation, is a legal process that facilitates the negotiation of debt settlement between the debtor and the creditor. Debt settlement is the fastest growing trend in debt resolution. It is a proven and effective bankruptcy alternative. Debt settlement is best suited for someone who has a lot of unsecured debts, which include credit cards, medical bills and collection accounts of all types.

Every year more than 1,200,000 Americans file for protection under the federal bankruptcy laws. Debt settlement is an aggressive bankruptcy alternative that provides debt relief and does less damage to your credit than what bankruptcy does.

Am I a good candidate for debt settlement?
Ideal candidates for debt settlement are people who have several credit card debts in delinquency and few, if any, assets. Other good candidates for debt settlement are people who have a low income and who show no sign of dramatic income increases in the future.

Don't wait too long to settle because a creditor can still sue you for the full amount of the debt plus any fees they incur in their collection attempts, including attorney fees. And, a judgment could stay on your credit report for up to 10 years, so it's best to get the debt settled before you are served with a summons. If the creditor has charged the debt off, don't let that discourage you because they may actually be a little more inclined to negotiate because once they've charged off the debt, they've accepted that they're going to take a loss anyway.

Can I do a debt settlement myself?
Yes, you can contact your creditors directly and negotiate with them. Just understand that creditors almost always require lump sum payments, but some may arrange a short-term payment plan lasting an average of 3-6 months. As part of the settlement, try to get the creditor to agree in writing that the debt will be reported to the credit bureau as "Paid as Agreed" or "Satisfied in Full". Some creditors may agree to this, but others may not. They'll report it as being settled for less than what was owed. This still is better than what would show up on your credit report after a bankruptcy.

If you are not comfortable in dealing with your creditors directly, contact a debt settlement company to represent you. The settlement company will create an escrow account for you. Every month you will deposit a certain amount of money in that escrow account. The amount you can deposit in your trust account depends on your disposable income (monthly income - monthly expenditure = disposable income). Once you have enough money in your account for the settlement company to work with, they will negotiate with your creditors to accept a reduced amount as full payment on your account. An efficient settlement company can reduce the payable amount to 40% - 60% of your original balance.

Be aware of tax implications.
The Internal Revenue Service considers $600 or more of forgiven debt as taxable income. The forgiving creditor must provide the taxpayer with a 1099-C tax form. This form will list the amount of forgiven debt and interest in Box 2. Taxpayers with portions of personal loans forgiven may not subtract the interest reported in Box 3 from the amount of reportable income on this form. However, the IRS does not require taxpayers to report forgiven debt if the taxpayer was insolvent at the time the creditor forgave the debt. Being insolvent means that the amounts of a debtor's debts are greater than his/her assets (how much money and property the debtor owns).

If at all possible, you should avoid bankruptcy because it has much worse implications on your credit than debt settlement does and bankruptcy generates a public record against you. And, while there are tax implications involved with your debt settlement, the implications will probably be less than what it would cost in time and money to file for bankruptcy.