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Debt settlement is a practice whereby an individual (or a debt settlement professional, on behalf of that individual) will negotiate with their creditors to reach a reduced payoff balance on their non-secured credit card debt. This practice is most often used by those people who find that their credit card debt is simply out of control and theyre finding it increasingly difficult to meet their monthly financial obligations.
If youre faced with this situation, and considering debt settlement, youre very likely confused due to the fact that youve read a significant amount of information relating to debt settlement via the Internet. Obviously, youve probably run across articles claiming that debt settlement is exactly the miracle that people strapped with debt are looking for. On the other hand, Im sure youve heard critics of debt settlement tell anyone whos willing to listen to steer clear of this practice due to the potential negative impact it may have. Lets take a look at some of the concerns about which critics of debt settlement are speaking.
Debt Settlement Can Negatively Affect Your Credit Score
Well, perhaps this may be true depending on your current situation. You see, debt settlement in itself doesnt negatively impact ones credit score; however, delinquency on your credit report will obviously have an affect. It may seem silly, but your creditors arent willing to listen to your sad tale and then agree to simply write off thousands of dollars of debt. Prior to doing so, your accounts must be classified as delinquent, and this delinquency will no doubt reduce your credit score. If, however, your credit file is already reflecting delinquencies theres a good chance that your credit is already less than perfect. Even if you have no delinquencies, maxed out credit cards may also contribute to mediocre or less-than-average credit.
There is good news, though. You see, if you simply can no longer keep riding your financial roller coaster, and debt settlement seems to be your only way out, your credit score will increase a great deal once your credit files are reflecting zero balances as a result of settling your accounts for less than the full balance. Normally you can expect your credit score to increase significantly within 6-12 months of completing your debt settlement program.
You May Have a Tax Liability As a Result of Debt Settlement
Again, this may or may not be the case depending on your own personal situation. Yes, the IRS requires that your creditors report canceled debt which exceeds $599. As a result, each creditor with whom you negotiate a reduced settlement will issue you a Form 1099 to reflect your canceled debt as income when it comes time to file your taxes for the tax year in which you settled your debt.
There is, however, an insolvency rule that exists for those people who are classified as insolvent; in order to qualify for this classification your liabilities must exceed your assets. If this is the case, you will very likely not be faced with a tax liability as a result of debt settlement. To be certain where you stand regarding this particular rule, however, its important to speak with a tax professional so that you have a clearer picture of income taxes and debt settlement.
Its unfortunate, but many people find themselves in over their heads, and must come to some decision regarding their financial predicament. If this is where youre at, whats most important is that you get some relief from your debt and consider all of your options. If youre still confused about the process of debt settlement, click here for more information.