Credit Debt Settlement: Should You Try to Negotiate Your Unpaid Debts?

Credit debt settlement is often necessary when you have more than $10,000 worth of credit card debt on your hands. If this is not taken care of soon, you could have some very angry creditors knocking on your door and calling your home phone demanding payment.

This sort of harassment isn’t unique to you. They make movies about people who can’t pay their bills and have loan sharks showing up at their doors. Now, this is sort of an extreme, but it still reflects the fears in the minds of many debtors across the United States.

Types of Debt Negotiated Using Credit Debt Settlement

Credit debt settlement companies act as the middle man between creditors and debtors. Many debtors aren’t used to nasty calls from less than friendly individuals demanding money. Once a negotiator gets involved, everything goes through them.

Now in some cases, hiring credit debt settlement services can work against you. If you owe enough money, a creditor might just as soon take you to court and sue you for immediate payment, rather than wait for you to pay a few cents on the dollar over several months.

Keep in mind that credit debt settlement companies are a benefit for themselves and their clients, not so much the creditors. The reason a creditor would want to comply is that they don’t want to get involved in a legal battle and may just take any payment they can negotiate.

Credit debt settlement, if carried out properly, can save you, the debtor, literally thousands of dollars in loan payments. Bear in mind that not only are the credit debt settlement companies negotiating down your actual debt, but they’re negotiating down the interest that has stockpiled on top of that debt as well. If allowed to accrue for too long, that interest will really help drive the last nail into the coffin of your credit score.

Not all types of debt qualify for credit debt settlement company negotiation. For instance, secured debts, like home mortgages and student loans, won’t qualify because they have collateral to back them in case of a default.

But things like credit card debt, unpaid utility bills, unpaid department store debt and other “small-time,” “non-asset backed” debt qualifies for credit debt settlement. This is important, as this type of debt generally leads to high interest rates compiling on top of your debt balance.

This debt is also common to perhaps the widest range of people. For instance, most college students don’t take out a mortgage on a $600,000 home, but they may very well rack up some serious credit card debt by taking expensive Mexican vacations during Spring Break and buying all their clothes at Hollister or Express.

The Ugly Side of Credit Debt Settlement

There are several drawbacks to credit debt settlement that you should familiarize yourself with before you get anxious to pick up the phone and call the closest debt negotiator on the block. Realize that many, many people wish to have debts forgiven or only pay a fraction of their debt, so this benefit comes with certain sacrifices.

1. Your credit score: Your credit score is one of the first things to slide when you go through credit debt settlement. Here’s what happens: when you stop paying the people you owe for a few months, your credit score goes down the toilet. It might be months before your debt is all paid off, and your score will reflect that for several years. In the meantime, signing up for anything that requires someone to take a look at your credit score will get increasingly difficult.
2. You’ll have to follow a debt management plan: Credit debt settlement isn’t just about reducing your debt; it’s about responsibly making payments on it. If you agree to sign up for debt services, you’ll have to agree with the management plan that goes with it. If the plan doesn’t look promising or reputable, pick a different company.
3. You must still pay tax on unpaid debts: Technically speaking, if you received money and don’t have to pay it back, it’s income, and that’s exactly how the IRS sees it. You’ll have to report the unpaid amount of debt on your tax return in order to properly file your taxes.

The FTC recommends taking several precautions before involving yourself with a credit debt settlement case. First of all, they recommend contacting the Attorney General in your state to check out the company’s reputation. Secondly, ask about all the fees, hidden and disclosed, that are included in your payment. In some cases, those fees may  near the total of your debt, in which case you don’t have that much to win by getting involved in credit debt settlement. You may also wish to cite hardship as a reason you cannot pay your debt if you have lost your job or if your finances won’t allow you to do anything but try credit debt settlement to sort out your situation.

 

 

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