Debt settlement is admittedly one of the most controversial debt relief programs available. But despite that, you cannot doubt that it is very effective. However, the success of this debt relief program will depend on how you will implement it in your credit situation. There are a couple of things that you need to remember to make this debt solution successful.
- Don’t include debts that are no longer legitimate.
- Put creditors on the defensive – you are the one with options.
- Remember to keep your cool during debt settlement negotiations.
Debt settlement offers the least expensive solution for eliminating debt if you can convince your creditors to accept your settlement offer. Your creditors certainly will not be eager to accept a low settlement offer. Before you plunge headlong into a debt settlement strategy, consider the following tips that can bolster your case to creditors for maximizing the amount of debt eliminated.
Use Debt Settlement Programs for Legitimate Debts Only
Just because a debt collector demands payment does not mean you are legally required to pay. Many instances of collectors pursuing consumers for debts they do not owe or are no longer required to pay have been documented, and unfortunately, many consumers have paid invalid debts when intimidated. Before you pay any debt, first confirm that the debt is legitimate by double-checking these items.
Don’t pay debt that has been “charged off.”
Many creditors write off defaulted debt as uncollectible and take a tax credit for their loss. They may then send you a Form 1099 in the amount of the debt forgiven, on which you may have to pay state and federal income taxes. If that has happened, you no longer owe that debt.
Don’t pay debt that creditors have sold off to a debt collection agency.
If the debt has been sold, you no longer owe the money to the original creditor and do not have to pay should they call you to collect. Before paying any debt claim, confirm that the debt is legitimate by mailing a debt verification letter to the company trying to collect. You must see proof that the debt is owed by you. At the same time, proof should be given that they have the right to collect it. If you are dealing with a debt collection agency, it must confirm that it is licensed in your state to collect the debt.
Don’t pay debt on which the statute of limitations has expired.
Every state limits the time a creditor has to use the legal system to collect a debt. If the statute of limitations has expired, you have no legal responsibility to pay the debt. However, note that the statute does not prevent a creditor or collection agency from attempting to collect the debt. Your recourse, in that case, is to notify the collector by certified mail of the basis for your refusal to pay and of your demand that it cease efforts to collect.
Let Creditors Choose Between Bankruptcy and Debt Settlement
To negotiate the best deal, creditors have to believe they can get no better deal than you offer. What would be worse for them than accepting a low settlement offer from you? You filing for Chapter 7 bankruptcy protection.
While the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it harder to wipe out unsecured debt in bankruptcy (Chapter 7), if you do qualify, those creditors face the very real possibility of never collecting a dime from you. In that case, the lowest debt settlement offer is better than nothing. Review the requirements for Chapter 7. If possible, adjust your financial circumstances to qualify before approaching creditors with a settlement offer. You have to make it clear during the negotiations that your decision will not be based on whether you can pay the settlement amount they request. Rather, it will only consider whether a settlement is a better (i.e., cheaper) solution for you than bankruptcy.
Prepare for the Tax Consequences of Debt Settlement Programs
In general, any debt forgiven by your creditors will be considered taxable income by state and federal taxing authorities. Understand the exemptions to that requirement. This includes insolvency, bankruptcy, or dispute of the debt, and consider action that can allow you to qualify for an exemption. If so, you can save 15 to 35% of the forgiven amount that would have been paid in taxes.
Don’t Agree to a Debt Settlement Offer You Cannot Afford
While most debt settlements involve a lump sum payment of the entire debt minus the reduction agreed to by your creditor, it is possible to negotiate any deal, including scheduled payments. In any case, you should not agree to a deal that you cannot afford. Defaulting on a debt settlement agreement will likely lead the creditor to file suit for the original amount plus penalties, late fees, attorney fees, and court costs.
Debt Settlement Is Business – It’s Not Personal
Do not let your emotions influence your actions during the settlement negotiation. Be civil to the creditor’s representative and maintain a positive attitude. Certainly, this is a stressful period in your life. But debt settlement will be a positive event that begins your journey back to financial stability.
The creditor will undoubtedly seek to drive a hard bargain. They could even possibly become unprofessional. After all, they are the ones losing money. Maintain your self-control. You, in fact, hold all the cards. You are in the position to drive the negotiation to attain the settlement you want. Take comfort in that fact and treat the creditor with respect. Your offer will be more likely to be accepted if you remain polite and courteous.