Can You Really Settle Your Debts for Pennies on the Dollar?

By Garrett Sutton, Esq.

For those who simply cannot pay back the credit card debt they owe, debt settlement is an option that may allow them to get rid of their debt and move on. I discussed it in my book, The ABC's of Getting Out of Debt and, as a result, have been getting questions from people who are considering it. Here's how debt settlement works, and how to decide if it is right for you.

What is debt settlement?

The process of debt settlement has been around for decades. It involves negotiating a lump sum pay off on a debt that you otherwise wouldn't be able to pay in full. Most debts can be settled for anywhere from 25 – 75 cents on the dollar.

How does it work?

When you fall behind on your unsecured debts, creditors realize that you might be headed for bankruptcy, and if you go that route they could wind up getting little or nothing. Rather than take a total loss on the debt, they will usually offer a reduced settlement. The longer you go without paying, the more attractive the offers usually become. At some point, however, the creditor may either give up and turn it over to collections or decide to pursue legal action against the debtor. So knowing when to settle is part of the art of debt settlement.

Who is a good candidate for debt settlement?

If you can afford to pay back your debts through a credit counseling program, I recommend you first go that route. It will have less of an impact on your credit, and will be less nerve wracking! However, some consumers simply can't afford to pay back 100% of their debt (plus interest) through counseling, and for them, debt settlement may be a better option. Keep in mind, though, that settlement doesn't offer the legal protection of bankruptcy. Consulting with a bankruptcy attorney is also important so you know all your options.

How do I find a good company to help me with debt settlement?

Be very leery of the ads you see online for companies offering this service. While some are legitimate, others may be more interested in collecting a fee than in helping you successfully resolve your debt. You can read about the company we have been sending consumers to at DebtSettlementSuccess.com. A good debt settlement firm will help you clearly understand your options, and be realistic about the challenges you may encounter along the way while working to help you achieve the best resolution of your debt possible.

Can I settle my debts on my own?

I don't recommend you go it entirely on your own. Creditors and collectors will be calling you constantly, and you won't know whether a settlement offer is a good one, or you might make poor decisions under pressure. However, if you decide to try to do some of the work on your own, there is an excellent self-help program available at DebtNegotiationSuccess.com. Created by a former executive with a debt settlement firm, it will explain how the process works and give you solid advice for dealing with your creditors. Even if you decide you'd rather hire a firm to help you settle, the free report will give you helpful insight into what to expect.

My bankruptcy attorney/credit counselor/financial advisor says debt settlement is a scam.

While there have been some companies that have ripped off consumers, it doesn't mean debt settlement can't be a legitimate option for those who can't afford the payments required in a credit counseling program and aren't good candidates for bankruptcy. A Chapter 13 bankruptcy, for example, takes five years and may force you to surrender some assets you want to keep. In that case, debt settlement may be faster and more advantageous, depending on your situation. But you do want to pick the firm you work with carefully.

What will my interest rate be when I am in this program?

Creditors are not going to settle your debts for less than the full amount unless you stop paying and fall behind. When your debt become delinquent, your interest rates will likely skyrocket and your debt will grow as a result of fees and interest. However, eventually you will settle the debt for less than the full balance, so the interest rate is largely irrelevant. Paying back $4000 on a $10000 debt, for example, is still cheaper than paying back 100% of a $7000 debt with interest.

I've heard I have to pay taxes on the settled debt. Why?

The IRS considers forgiven debt to be income. So if you owed $5000 (including interest and fees) and settled for $2500, the $2500 difference would be considered taxable income. However, if you can show the IRS that you were insolvent at the time, you can often get that tax waived. Talk to your accountant for more details.

It's not easy to resolve debt problems, but once you do, you'll sleep a whole lot better at night. If you think you may have to go this route, don't procrastinate. Evaluate your options and take care of your debt.

For more information on credit and debt issues visit Gerri Detweiler’s excellent blog site:
http://www.businesscreditsuccess.blogspot.com/

About the Author:

Garrett Sutton, Esq. has over twenty years experience assisting and advising entrepreneurs, families and business in selecting the appropriate corporate structures to limit their liability, protect their assets and advance their personal and financial goals through real estate investments and other means of wealth creation.

A best-selling author, speaker and a member of an elite group of "Rich Dad's" advisors, hand selected by author Robert Kiyosaki, Garrett speaks to investors and entrepreneurs on a variety of topics including asset protection, liability limitation, wealth creation, as well as various business and real estate issues. As an advisor for Robert Kiyosaki, Garrett has authored Own Your Own Corporation, How to Buy & Sell a Business, and co-authored Real Estate Loopholes. These titles are included in the "Rich Dad, Poor Dad" wealth-building book series. Additionally, under the SuccessDNA Publishing label, Garrett has authored and co-authored numerous books including, How to Use Limited Liability Companies and Limited Partnerships. Visit www.CorporateDirect.com for more information.

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