Going through the debt settlement process can be a good way for a person or family to avoid bankruptcy and reduce their debt to a manageable level. The process can also be complicated, have an impact on a person’s credit score, and/or leave a person or family with a large tax bill. Understanding how this process works is essential for anyone who is considering using it to get out of debt.
In general, a person or family will start the process of settling their debts when it becomes too difficult to pay their bills. Any family that cannot make their minimum payments is definitely a candidate for this process, but debt settlement is not limited to people who are struggling with their bills. In fact, many people choose to do this simply because they want to reduce their total amount of debt they have.
After contacting a company specializing in this service, a financial professional will list out all of the bills and debts the consumer currently owes. The amount of time that this person has been in the industry, however, can vary a lot between companies, making it critical that consumers research the companies that provide this service before choosing one. After compiling the list, the company is able to start negotiations with each of these creditors. The goal is to reduce the interest rate of the loan, reduce the monthly payment, and/or get the creditor to forgive all or a part of the debt.
Rather than rely solely on the negotiation skills of the financial professional, most settlement companies will develop relationships with a lot of the major lenders. It is because of this relationship that lenders choose to agree to accept a reduced payment on a loan in lieu of the total amount that is actually owed by the borrower.
Lenders are also willing to negotiate a debt if they believe that it will prevent the borrower from declaring bankruptcy. During a bankruptcy, a consumer can discharge all of the debt, leaving the lender with nothing. It is actually this threat of losing everything that they have loaned out if a person decides to declare bankruptcy that motivates creditors to negotiate. Most banks realize that lowering a borrower’s payments is often the only way that they can make sure they will get some kind of return from its investment.
It is important, however, that anyone who is considering this process as a way to reduce or eliminate their debt to remember that a creditor who agrees to settle with a borrower is considered by the federal government to be forgiving the debt that is owed by the borrower. Under the terms of the current tax law, any forgiven loan amount is subject to being taxed.
Settling debt can be a good process for any person or family that wants or needs to pay off their debt quicker and/or make their debt payments manageable. Consumers should carefully research their options before deciding that this is right for them.