Debt Settlement and Debt Consolidation

Debt settlement is another option to possibly consider as part of a debt relief attorney’s tactic against creditors. It is best used as a secondary resource in the event the debtor is not eligible for bankruptcy or would otherwise lose assets by filing for bankruptcy protection.

For individuals who owe large debts to one or more creditors and are having difficulty making payments, debt settlement may be attempted to settle the account for less than the current balance. Oftentimes with debt settlement, the amount of the settlement is dependent on how quickly you can pay. A debtor who has a lump sum payment to offer usually gets the best settlement offers versus someone who wants to make payments over time. Individuals who do not have lump sum offers to settle their debts are probably more appropriate for debt consolidation (discussed below) rather than debt settlement.

A knowledgeable debt relief attorney can help guide you through the process of debt negotiation and help you determine the order in which to settle accounts and amounts to offer. This will save you time on your behalf by not having to deal with the phone calls, documentation and all the other tasks involved. Any debt relief lawyer who has experience in this field will have insight as to the terms and amounts creditors may or may not accept. A debt relief attorney should not guarantee his or her ability to get you a certain offer because every creditor and situation is different. Factors including the age of the account, balance owed, financial status of the debtor and likelihood of collection must always be examined before making any offer. Contact Jeffrey Larkin, an experienced and knowledgeable debt relief attorney that can help you decide if debt negotiation or debt settlement will work for you.

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Debt consolidation is the process of working with a group of creditors who agree to reduce the interest rate and/or principal balance on their accounts if certain criteria are met. Debt consolidation differs from debt negotiation in that the latter deals with settling individual accounts, whereas the former deals with crafting an agreement with a group of creditors who agree to accept a certain deal. For example, a debt consolidation plan could offer creditors $500 per month for 60 months, to be paid into a fund which is used to pay creditors on a pro rata basis. Creditors in turn agree to cease collection activity including lawsuits so long as the m monthly payment is made and waive any outstanding balance upon completion. As indicated above, debt consolidation is best suited for debtors who are not in a financial position to make lump sum payments and for which bankruptcy is not the best option.  Having said that, creditors are not obligated to agree to participate in a debt consolidation plan and to the extent a creditor does not participate, they will need to be dealt with outside of the debt consolidation plan. You should seek counsel from a debt relief lawyer with experience in debt consolidation to assist you in creating a plan with the best possible outcome for your situation.

Some of the pitfalls of proceeding with debt negotiation or debt consolidation include the uncertainty of the process (what a creditor will accept in debt negotiation or whether a creditor will participate in debt consolidation) and the impact on a debtor’s credit report. Most creditors will report a settled account on your credit report as “settled for less than the full balance” which is a derogatory mark on your credit that will remain for 7 years. While it is possible to negotiate for tradeline deletion on your credit, creditors always want additional compensation in exchange for the reporting. Depending on your overall goal and the need for future credit, a debt relief attorney who is experienced in debt settlement and debt consolidation should be consulted to see if this alternative is right for you.

Taxes – Lastly, with either debt negotiation or debt consolidation, at the end of the calendar year, borrowers will be issued a 1099-C by the creditor in the event they have forgiven debt of $600 or more on the account. This amount of debt forgiveness is treated as taxable income and added to your working wages. The increase could put you in a higher tax bracket depending on your situation. This is a significant factor to consider if the total amount of forgiven debt is large. While it is imperative you seek assistance from a debt relief lawyer if you are considering this option, a consultation with a tax professional may be necessary to ensure you come out ahead at conclusion of the process.

It is highly recommended that you seek the advice of a knowledgeable debt relief attorney who can help guide you towards the best solution to your debt. Contact the Larkin Law Firm today!