Debt Settlement is the process of negotiating with your creditors to settle your unsecured debts for "less than you owe". Debt settlement through these types of negotiations is an aggressive, yet ethical approach to paying off your creditors at reduced amounts and avoiding bankruptcy. Debt settlement programs typically require a minimum of $10,000 in unsecured debts. These programs are tailored to your personal financial situation. Debt settlement firms are "for profit" organizations, and therefore, will not provide the services that credit counseling agencies do, such as budget planning and financial counseling. A debt settlement firm lowers your monthly payments by requiring one "reduced monthly settlement payment" as part of their program design.
Debt settlement programs are best suited for those individuals under considerable financial strain and who are having difficulty meeting even their basic financial obligations. The reason creditors will actually settle for less than the full amount due, is that they realize a consumer could file bankruptcy, and then they receive nothing on the balance owed to them. Creditors, of course, want to get as much as possible on the amounts owed, and sometimes accepting a negotiated amount (less than full balance) offer is in their best interest as well.
While debt settlement is a way to get out of your debt problem in a relatively short amount of time, and with the least cash outflows of all methods (with the exception of filing bankruptcy), there are disadvantages.
The debt settlement process requires that the debtor commit to saving their money and setting aside "lump sums" so that their accounts can be negotiated for reduced amounts. As a creditor is not willing to negotiate on an account that is current in its payment history, these accounts must be allowed to go delinquent while in the program. Delinquent and missed payments are reported by creditors to the national credit bureaus, and this is ultimately harmful to your credit rating. Also, the IRS considers a debt forgiven to actually be taxable income, and they expect to receive the requisite amount of taxes to be paid on the "forgiven amount" at the end of the tax year. You should inquire about this, in detail, while discussing your situation with the debt settlement firm(s) you are considering. It is also recommended that you seek the advise of a tax professional.
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