For consumers who are overwhelmed by crushing debt, debt settlement – the process of negotiating with creditors to reduce debt balances – can come as a huge relief. Overall, everyone gets what they want: The consumer pays off the debt and is relieved of financial burdens, and the creditor gets some of the money owed. It can be a win-win situation.
Also known as debt negotiation, debt settlement allows debt to be negotiated down to reduce the overall balances. It is most advantageous to borrowers who have credit card debt and other bills including personal loans, medical bills and automobile repossessions. Borrowers can negotiate with creditors directly or they can hire a debt settlement company.
Starting a Debt Settlement Plan
Debt settlement can be helpful for anyone with overwhelming debt. Economic experts say that consumer debt beyond 50 percent of net income can herald financial problems. If you are skipping payments, putting off payments or taking out short-term loans to make payments, then debt settlement could be a good solution for you.
A good first step in debt settlement is locating a trustworthy company. You may also choose to settle your debt on your own. Once all of your finances are outlined, the debt settlement company or the consumer will draw up a tentative plan of attack. Consumers will put money aside monthly. Once plans are hammered out with the individual creditors, and you have enough money saved up, debts are paid one at a time.
Following Through with Debt Settlement
As with any financial dealing, it's important for consumers to be aware of the process and know where their money is going. Make sure that all settlement deals are in writing and both parties sign them.
Also, it is important to consult a tax professional once the settlement has gone through. The Internal Revenue Service considers forgiven debt to be income and taxable under most circumstances.
Future Credit After Debt Settlement
Once the debt is paid off, the process of rebuilding your credit can start. One important key to rebuilding a credit score will be to request that the settled debts be reported as “paid in full.” This way, there are fewer black marks on your credit report.
Most borrowers find that debt settlement allows them to pay off overwhelming debt and free them up to focus on other things in life.
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