Debt Settlement - What is it?

In essence, debt settlement (negotiation) can help you get out of debt for the least amount of money in the shortest amount of time and avoid having to file for bankruptcy.

A debt settlement company will establish a monthly savings plan that fits your budget based on your total amount of your debt. In addition, the company will negotiate a settlement amount with your creditors, which is often substantially below the existing balance of the debt.

When you have saved enough money to settle with a creditor, you authorize payment from your savings account, the creditor receives the money and the payment clears the bank. Your account with that creditor is then ‘paid’ or ‘settled’, the account is closed and you owe nothing more.

Unlike Debt Consolidation, Credit Counseling or Bankruptcy programs, if you enroll in a debt settlement program it won’t show up on your credit report. After completing a debt settlement program and all of your creditors have been satisfied, it will appear as though you have handled all of your creditor accounts on your own without any third party intervention and you should be in a position to repair your credit scores in order to re-establish credit again.

Some creditors will issue IRS Form 1099 showing the money you saved as income, which may possibly be subject to income tax. However, you can fill out IRS Form 982 which indicates proof of insolvency. Based on insolvency, the income reported by the creditor on Form 1099 would not necessarily be taxed as income. Of course, it’s always best to consult a tax professional in these matters to see how it actually pertains to your situation.

Congratulations on taking control of your debt!