If you are drowning in credit card debt, you may wonder if there is a way you can get rid of your debt without filing for bankruptcy protection. Erasing debt can reduce stress and leave more room in your budget for discretionary purchases. In some cases, settling debts can be a viable alternative to filing bankruptcy.

This strategy involves settling an outstanding debt with a creditor for less than the amount that you owe. The creditor then forgives the remainder, so you never have to pay it back. The amount you can save depends on your ability to negotiate with the creditor and how likely the creditor believes you will be to ever repay the full balance on your account. You may be able to pay only 50 percent of the balance if the creditor knows that bankruptcy is your only other alternative.

Settling a debt can help you avoid bankruptcy because it helps you get rid of debt more affordable than trying to pay off the full balance.

You can either negotiate with creditors on your own, or work with debt settlement companies that negotiate on your behalf. In some cases, these companies may have more leverage to negotiate a lower settlement amount than you could obtain on your own.

Creditors are typically not willing to entertain debt settlement if you are current on your payments. This is because, as long as you have made your payments on time, the creditor has no reason to believe that you cannot pay the full balance. Since the creditor incurs a loss with a settlement, it will want to receive full payment if at all possible.

The severity of your delinquency can also factor in to a creditor’s willingness to settle a debt. If you are only a few days behind, a creditor might not want to negotiate. Conversely, if you are 90 days or more behind, the creditor might view a settlement as a way to recoup at least some of the funds due. After all, if you file Chapter 7 bankruptcy, the creditor will not receive anything.

There are several issues to consider before agreeing to debt settlement. You should have the funds available to pay the settlement amount in a lump sum. Creditors typically will not let you pay a settlement in installments. If you are already having financial trouble, coming up with a lump sum payment can be a challenge.

Settling a debt may hurt your credit score, particularly if you are not severely delinquent. Creditors report settlements to the credit bureaus, and debt shown as “paid less than full amount owed” is considered a negative entry. If you already have a spotty credit history, though, a settlement might make little difference.

Also, keep in mind that you will have to pay taxes on any forgiven amount over $600. Creditors must report forgiven debt to the IRS, and you must also report it on your tax return. You will be taxed on the forgiven debt as earned income at the standard rate for your tax bracket.

This Article comes from : Debtshield.com

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