Straight Answers on Debt Settlement, and What the Critics Won't Tell You
Get the straight scoop on debt settlement and answers to common criticisms and myths cited by so many "experts"
There are several very good options open to an individual deep in credit card debt. Debt settlement is one of the better options available, but critics of this debt management solution don't give the whole story. Basically, there are three main areas to focus on when considering a debt settlement solution.
Picking the Right Debt Settlement Company
When the time comes to start negotiating a settlement with your creditors, I suggest you go with a reliable, experienced, debt settlement company, rather that going it alone. The most important decision is which type of company to do business with. There are a lot of debt settlement companies available, but not all of them have YOUR best interest at heart. Most only care about taking your money rather than settling your debt amicably and quickly, while getting you the best settlement.
The right company should present you with all the possibilities up front and should represent your interests with integrity. The costs and risks involved should be discussed prior to anything being signed. Be sure to look for those companies that have a good track record with the Better Business Bureau. What you are looking for is a lot of unresolved complaints.
Look for a company that will work on a performance-based fee schedule like Hoffman, Brinker and Roberts.
Tax Liability
Most of the critics rely on this as a scare tactic to steer clients away from a debt settlement program. The truth is that there is a possibility of a tax liability resulting from a debt settlement. Creditors are required to report any canceled debt in excess of $600 to the IRS on a form 1099-C. The IRS views this as taxable income (actually a gift) on your end and, as a result, you are expected to pay tax on the forgiven amount, claiming the income on line 21 of your 1040 form.
The IRS has a contingency called the insolvency rule, which means that if your liabilities exceed your assets, there will be no tax burden for you on the cancelled debt from a settlement. This applies to more than 95% of people opting for a debt settlement solution. To claim insolvency is a simple process of filling out IRS Form 982 and documenting your insolvency.
Realistically, you are already in financial trouble and that means you are probably already insolvent, relinquishing you of tax liability on the cancelled debt. Always consult with a tax professional when preparing your taxes after a settlement.
Negative Impact on Your Credit Report
This is yet another debt settlement myth that so called "experts" don't tell the whole truth about.
If you are in a debt situation that is serious enough that you are considering debt settlement, bankruptcy, or any other drastic debt solution, your credit rating should probably not be a big factor.
In fact, choosing debt settlement will raise your credit score quicker than if you do nothing, because it drastically reduces your debt load and thus decreases your debt to income ratio, both of which you can't do with debt consolidation.
Bankruptcy on the other hand, will have long-lasting negative effects on your credit, and is hardly ever recommended unless your creditors have already taken you to court.
Let's be honest for a minute. When you get to the point where you have trouble making the minimum payments and it begins affecting your health among other things, you are already seeing a negative impact on your credit.
What a debt settlement does is stop the calls, stops the worrying and brings peace of mind. Your balances are paid down at a lowered amount that is usually around 50% or less of the original total. When these balances are satisfied, the company you used to negotiate the settlement requires the creditor to show your account as "paid in settlement" or "satisfied" on the credit reports. The negative impact on your credit is only temporary at best.
Within 6 to 9 months of completing the settlement, you will see your credit begin to rise again. Why? Because all the balances are now at $0 which was your intent to begin with. Using a debt settlement company does not kill your credit rating, delinquencies do. Paying them off shows good on you as opposed to filing a chapter 7 liquidation bankruptcy.
Keep these things in mind when you read and hear the so called "expert" tell you that debt settlement is not the right way to go. Most likely, they want to sell you a different solution, not the one that best fits you.
