Using A Debt Settlement Program To Eliminate Debt
While several options are available for those who wish to get rid of their debt, debt settlement is one of the more popular options available in the market today. If you are struggling with debt and you have multiple accounts, debt settlement is something that you’ll want to take a look at.
How it Works
Debt settlement is a process in which you enter into negotiations with your creditors on a one-on-one basis. You offer the creditor a certain amount of money in a lump sum. The creditor then takes this money and closes your account, even though you did not pay the full amount that you owed. Once you pay your creditor the money, it will write off the rest of the amount that you owed.
Debt Settlement Programs
While debt settlement is a process that can be facilitated on an individual basis, many people also enter debt settlement programs. These programs are typically offered by debt relief companies that promise to be able to help you with your debt problems quickly.
If you decide to enter into one of these programs, you will be advised on how to proceed, and the company will handle the negotiations for you. Typically, you will be asked to open a savings account and start setting aside a certain amount of money every month until your account balance gets to a certain point. After your account balance reaches that specific point, then the debt settlement company will begin the negotiation process with your creditors. The debt settlement company will offer a specific amount and try to get the creditors to accept it.
Although this type of program can be beneficial because it pays off your debt faster, it can also hurt your credit score. Credit card companies and other creditors will report this information to the major credit bureaus. This means that other creditors will be able to see that you did not fully pay your bills and will be less likely to offer you credit in the future. If you do get approved for credit, it may be at a higher interest rate than what others have to pay.
After going through debt settlement, you will need to take some steps to rebuild your credit score over time. Start making payments to your creditors on a regular basis. Once you have a positive payment history and no outstanding debt, then your credit score will start to steadily improve.
It will not only be your credit score that you have to look into. Uou will also have to consider the tax consequences of doing so. When a creditor writes off your balance, the company will take a tax deduction on the amount written off. The creditor will send a tax statement to the IRS with this information. You will also receive a 1099-C as well. This tells you how much the creditor wrote off for the account. This amount counts toward your taxable income for the year. You will have to pay taxes on the amount at your marginal tax rate.
Making the Decision
It is best to understand that debt settlement is not without some consequences. However, it still remains one of the most effective ways to get rid of your debt quickly. You might be struggling with debt and you need to get a head start toward rebuilding your financial life. A settlement is definitely an option for you to consider. Just understand you may have to pay taxes on the debt that is forgiven according to Forbes. Remember that it may be difficult to qualify for credit again in the immediate future after settling your accounts.