What Is Debt Settlement?

Debt is a common topic for many people. It could be student loans, credit card bills, or other types of financial obligations. There are different approaches to paying off debts and trying to figure out which one is best can be overwhelming. Some people choose to pay off their debts on their own, while others would rather have a company help them settle debts.

This raises the question, what is debt settlement?

Let’s take a look.

What Is Debt Settlement?

Debt settlement is a voluntary agreement between you and your creditors to resolve delinquent debts for less than the full amount owed. While debt settlement might sound like you are not getting out of debt — because you aren’t — it can help you get control of your finances.

If you have fallen behind on loan payments or other bills, it’s a good idea to try to negotiate with your creditors for better payoff terms. This could well give you the opportunity to reduce the amount of money owed.

When You Fall Behind

Creditors can do many things when borrowers fall behind on their bills.

First, they may try to collect payments using traditional methods, such as calling for regular monthly payments or turning your account over to a collection agency. Creditors may also take legal action, such as filing a judgment for delinquent payments or placing a lien on your property to force payment.

If you find yourself in this situation and cannot cover your debts as well as your personal expenses, you could benefit from learning what debt settlement is — and is not. While you can do debt settlement on your own, it’s often more productive to hire an outside agency like Freedom Debt Relief to handle the negotiations. These agencies are familiar with the creditors’ collection processes, and they’ll have access to information about your assets to use as leverage during settlement negotiations.

Typically, a debt settlement agreement takes the form of an offer from the creditor to accept less than full payment on delinquent loans in exchange for a one-time payment in full of the amount both parties agree upon to settle the account.

You’ll be required to start an escrow-like savings account to gather enough funds to make viable settlement offers. Once the account has accrued a sufficient amount, based upon your outstanding balances, the settlement agency will begin working with creditors on your behalf.

The Risks of Settling

Although settling delinquent debts can help you regain control over your finances and take steps toward becoming debt-free, there are some risks involved with negotiating with creditors on your own.

Chief among them is the fact that settlement negotiations aren’t guaranteed to work. After all, creditors have no obligation to accept such offers. That said, most credit card companies would negotiate, once they see your only other alternative is filing for bankruptcy protection.

You should also be aware that settling debt could trigger an IRS bill. Depending upon the amount forgiven, some creditors notify the Feds when they accept a settlement, so they can write off the forgiven portion as a loss. The IRS will then consider the cancelled portion of your debt as taxable income.

And, of course, whenever money is involved, it’s important to take steps to ensure the veracity of the agency with which you’re dealing. Using Freedom Debt Relief as an example again, the firm is accredited by the American Fair Credit Council and has strong testimonials from past customers. These can be signs you’re dealing with an organization dedicated to functioning in your best interests as you’re working to understand what debt settlement is and how it can benefit you.