Debt Settlement FAQs: Answers to the Most Common Questions
Have you heard about debt settlement as a way to tackle your out-of-control debt? Are you interested in learning more?
Debt settlement is a debt relief approach that involves engaging a debt settlement company to negotiate with your creditors to resolve, or settle, your debt by paying them a lump sum that is less than the total amount you owe.
Debt settlement can be a great option for those seeking relief from their burden. Here are five frequently asked questions about debt settlement to help you determine whether it is the right financial approach for you.
How Long Does It Take?
Debt settlement can be reached with just one phone call to your creditors, but more likely it will involve more time. It ultimately depends on the facts, such as the amount and type of your debt as well as what amounts your creditors are willing to accept. In addition to the time it takes to negotiate a lump sum that the creditor will accept, the debtor (you) needs time to save up that lump sum, which usually takes a few months to possibly a year or more.
Will it Affect my Credit Score?
The short answer is yes, debt settlement will impact your credit score. When your debts are settled, those settled debts will appear on your credit report for up to seven years, which negatively affects your score.
However, to enter a debt settlement program, you will have likely been delinquent on paying your debt for some time, so your score will already have suffered. Remember that, over time, credit scores recover. It is often better to resolve your debt and get your finances back on track, even if it means taking a hit to your score in the short-term.
Can I Settle my Debts on my Own?
You can absolutely settle your debts by yourself by negotiating with your creditors directly. However, many consumers find this process overwhelming, confusing, and intimidating, as creditors can be very persistent and hard negotiators. If you owe more than a small amount or carry debts across several accounts, it is usually best to consult with a debt settlement company who can guide you through the process, negotiate with your creditors on your behalf, and obtain the best possible outcome.
Is Debt Settlement the Same as Bankruptcy?
Debt settlement and bankruptcy are two entirely different forms of debt relief. Bankruptcy is usually seen as a last resort, as it involves lawyers’ fees, court dates (a judge must approve your bankruptcy petition), and a larger “ding” to your credit score (a bankruptcy will remain on your credit report for up to ten years). On the other hand, debt settlement is handled entirely outside of the court system. You, or the debt settlement company you hire, negotiate directly with your creditors to resolve your debt.
How will Debt Settlement Affect my Taxes?
It is possible that you will have to pay taxes on the amount of debt settled (i.e., the amount of debt you didn’t have to pay back to your creditors). The IRS considers this amount of settled debt to be “income.” However, the IRS does make exceptions for those who were insolvent at the time the debts were settled. Because this can get complicated, it’s best to keep this in mind at the beginning of your debt settlement process and consult with a tax advisor or accountant to determine how debt settlement will impact your taxes.