Are you thinking about settling your debt on your own? While there may be debt settlement companies offering to do it for you, you can do it yourself and save money on fees. Plus, many creditors prefer working directly with you over the debt settlement companies anyway.
Here are 5 Important Things You Need to Know Before Settling Debt:
- Negotiate a repayment plan with your creditor before it goes into collections. Creditors are usually easier to work with than debt collection agencies, so contact your creditor to discuss a repayment plan that works best for you. Be upfront about any circumstances that are preventing you (e.g. unemployment) from paying as agreed.
- Settling your account may negatively impact your credit report. If your creditor agrees to accept less than the amount owed, it could be reported as settled and affect your credit score.
- The IRS may treat any reduced debt as taxable income. This means you could owe taxes on the amount of debt you were forgiven ($600 or more).
- Beware of creditors who ask for electronic access to your financial institution’s account in order to settle. Typically, creditors settle for an upfront lump sum cash amount only. For example, you may pay $400 (50 -60% off) in cash on an outstanding balance of $900.
- Always get the settlement agreement (full terms) in writing before you settle your debt. Any agreement that you make should be received in writing to ensure your creditor’s commitment to the terms of your settlement.
In the event they agree to a payment plan and request electronic access to your account for withdrawals don’t give it to them. If you allow them to automatically withdraw money from your account, you no longer have control of when or how much you pay them unless you close the account.
The items above are some considerations to make before settling your debt. Ideally, it’s best to follow through on your commitment to pay your creditor in full. However, if you have extenuating circumstances preventing you from paying your account as agreed – I hope that you find this post helpful and wish you the best in settling your account.
CreditCards.com – 8 myths about settling credit card debt is a great read for those considering debt settlement.
Do you have any experience or tips to share on settling debt?