An In-Depth Look at How Debt Settlement Works

Debt settlement is a less drastic alternative to bankruptcy. Bankruptcy should be a last resort. It is a decision that there is no way you can pay back your debts, and filing for bankruptcy will impact your credit score and even job prospects for several years. Debt settlement, on the other hand, has less severe consequences but it is still a serious step. If you are considering debt settlement, a Morris County bankruptcy attorney can review your situation with you and help you make the best decision.

Important Steps of the Debt Settlement Process

  • Usually a debtor does not deal with his or her creditors directly. Instead, a debtor consults with a debt settlement company. This company is a third party that will negotiate on the debtor’s behalf with his or her creditors. Debtors should do thorough research on the company to avoid falling prey to scams.
  • For debtors dealing with creditors on their own, debtors should ensure that all communications between them and their creditors are in writing. With phone conversations, debtors should write down with whom they spoke, the person’s title, the date and time of the conversation, and what the parties discussed. They should follow up the phone conversation with a letter noting what occurred. When sending documents and other correspondence to creditors, debtors should employ services that provide proof that the creditors received the correspondence.
  • The debt settlement company will seek to lower a debtor’s monthly payments so that the debtor can pay off his or her complete debts in less time. The debtor needs to cooperate as much as possible with the company in order to achieve the most favorable repayment plan. The company needs as many facts as possible about a debtor’s financial situation in order to negotiate with the debtor’s creditors.
  • If the debt amounts are high, creditors may agree to settle them for less than their full amount. This will happen, generally, when it is clear that the debtor will never be able to repay the debt in full and that the debtor is likely to declare bankruptcy. Creditors are more likely to eliminate anywhere from 10 to 50% of the debt, still leaving the debtor a large amount of the debt to repay.
  • It is important to note that, if creditors forgive a substantial portion of debt, debtors may have to report that debt when they file their income taxes. In some cases, the Internal Revenue Service treats this discharged debt as income.
  • As the debt renegotiation takes place, debtors will deposit money into a settlement fund. The debt settlement company and debtor will use this fund to pay down, gradually, the newly renegotiated debt.
  • As mentioned, the consequences of entering into a debt settlement program are less severe than filing for bankruptcy, but there are consequences nonetheless. In the short term, a debtor’s credit score will take a hit, but it would rebound as the debtor pays off his or her debt.

Debt settlement can be an effective and less severe alternative to bankruptcy. Contact a Morris County bankruptcy lawyer at Ast & Schmidt, PC if you would like to learn about how debt settlement can work for you.



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