Posted by Trent Accounting

How To Respond When Offered With Debt Settlement

How To Respond When Offered With Debt Settlement

Bills and debt are creating worries and anxiety. For once in your life, you feel to be drowning with debts and unpaid bills and right at your doorsteps, someone said that your debts are now settled. Anyway, fairytale exists. In reality, debt settlement is a form of debt relief where a creditor offers to reduce the principal amount you owe on your debt. For instance, you owe a certain credit card company for an amount of $10,000, offers you to pay a one-time payment of $6,000 only and agrees to forgive or erase the remaining $4,000.  Yes, it is possible that your debtor will be the one who will initiate the settlement without you requesting for it.  

How does it work?

There are some companies which engaged in debt settlement services and programs. They are usually third parties who will offer to contact your creditors, to negotiate a better payment plan or settle or a lump-sum payment less than your actual debt. They charge a fee by taking a percentage of the amount you’d save on the settled debt. They may require you to make regular deposits into an account which is under your control to save money for the lump payment but it will be administered by an independent third-party. While the settlement is still on the negotiation stage, they will advise you to stop paying your creditors until a debt settlement agreement is reached.

Once an agreement is reached, you need to agree with the agreement and make at least one payment for the settled amount. Then, the company can commence in charging fees for its services. Keep in mind that this is not a walk in the park, sometimes they will not be able to reach for a common ground and settle your debts which is risky.

While debt settlement allows the borrower to get out without paying it in full, people do not usually realize that a debt settlement can lead to a taxable event. IRS considers a condoned debt as income. If a settlement forgives for not less than $600 of debt, the creditor should issue a Form 1099-C, and you must be report that as income on your taxes. The only way to avoid this taxation issue is to prove insolvency on your taxes or file bankruptcy. Debt settlement can also be detrimental to your credit or cause significant damage to your credit score as much as a bankruptcy.

What happens next?

First, if you receive a settlement offer and decided to accept the settlement offer and pay the account in full. This is the easiest and fastest way to deal with the debt if you received a legitimate settlement offer. Carefully read the settlement offer or have an attorney review the offer at your option to assure the binding effect– that the creditor or collector can’t come after you for the remaining balance at some point in the future.

Second, you may negotiate for a lower settlement. Some creditors are willing to accept a lower settlement than the one offered in the letter. Once settling the debt is available to use the opportunity to see if the creditor is willing to accept a lower payment. Prior to giving a call or send a letter of negotiation, make sure you have an amount in mind. You’ll have more leverage if you’re able to pay the offered amount right away.

In either case, before you make a payment, the terms of the settlement must be in writing, on company letterhead with a signature from someone within the company who’s authorized to make this offer to you. You must specify the debt remainder that will be canceled after your payment.

Keep in mind that you are not obliged to take the offer. It could be that the settlement offer is too high or maybe you’re not interested in paying off this debt at this time. In either case, you don’t have to respond to an offer you’re not interested in taking.

Lastly, before enrolling in any debt settlement program, you may contact your state attorney general and local consumer protection agency to check whether there are any complaints on file, as recommended by the Consumer Financial Protection Bureau. The state attorney general’s office can check if the company is required to be licensed and whether it meets your state’s requirements.

Trent Accounting